HERI Committee Meeting

STANDING COMMITTEE ON CANADIAN HERITAGE

COMITÉ PERMANENT DU PATRIMOINE CANADIEN

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, December 7, 1999

• 1104

[English]

The Chair (Mr. Clifford Lincoln (Lac-Saint-Louis, Lib.)): Would the witnesses take their seats, please?

[Translation]

I'd now like to call the meeting to order. The Standing Committee on Canadian Heritage is meeting today to consider certain problems associated with the Canadian book publishing industry.

[English]

I declare open this meeting of the Standing Committee on Canadian Heritage, which has been convened today to study certain problems in the Canadian book publishing industry.

We are first going to hear witnesses from the department itself and afterwards witnesses from the Canadian Booksellers Association.

• 1105

I should mention that our meeting today will go until 1.30, as agreed by the members. We will break at 12.30 for maybe 15 or 20 minutes for lunch. I should mention, because members of the public are here, that the clerk has ordered 25 lunches, which are for members, witnesses, and staff. If any are left, then by all means the members of the public should avail themselves, but I just wanted to mention this because, as I say, they are for the members, the staff, and the witnesses.

We are starting our hearing with officials from the Department of Canadian Heritage: Mr. Allan Clarke, director, publishing policy and programs;

[Translation]

Mr. Don Stephenson, Director General, Cultural Industries; and Ms. Carla Curran, Chief, Book Publishing Policy.

[English]

Mr. Stephenson.

Mr. Don Stephenson (Director General, Cultural Industries, Department of Canadian Heritage): Thank you. We have a presentation to make that is what we would refer to as “Book Industry 101”, which will provide an overview of the industry and perhaps introduce some of the questions the committee wishes to to discuss.

With your permission, I'll proceed through that presentation, and then we can move to questions and answers. The presentation is available in both official languages and has been distributed around the table.

I would just note that there are a few errors, which we will correct as we go through the text. This was prepared on somewhat short notice over the weekend and yesterday, so a few errors did creep into the text. We'll try to correct as we go along. I will also make the presentation, to a large degree, in English.

[Translation]

Of course, I will be happy to answer your questions in the official language of your choice.

[English]

On page 1, the introduction first points out that the book publishing industry plays an important cultural role and that ultimately the objectives for the Department of Canadian Heritage in supporting the Canadian book publishing industry are cultural.

Our strategies in the cultural industry sector are very much industrial. The objective is to support a domestic industry in book publishing and magazine publishing, in sound recording, and in film production, but the underlying objectives are cultural. Ultimately the bottom-line measure of policies and programs in our sector is content: Canadian content being made accessible to Canadians. Our motto in the cultural industries branch is “It's the content, stupid.”

Our publishing policies have been remarkably successful in Canada. Our authors are well represented in the domestic market, with about half of the Canadian market being taken by Canadian-authored books, which is a remarkable number when you consider that the best of the writing of the world is also available on the Canadian market.

Canadian authors have achieved terrific international acclaim and success. Canadian readership is on the rise, which is another remarkable success. In the past 20 years, the number of regular readers of books has doubled. Forty percent of these readers describe themselves as regular readers of Canadian books. Eighty percent of Canadian-authored books are published by Canadian-owned and -controlled publishing houses, which is why our focus in policy is on encouraging a domestic industry, an industry that is owned and controlled by Canadians.

Despite these achievements, the Canadian book publishing industry faces challenges brought about by our market size and conditions and by changes in global and domestic markets. Deep changes in this industry will occur as a result of new technologies. The domestic industry is largely represented by small, undercapitalized firms, and they have the difficulties most SMEs would face in competing with large firms in their marketplace.

• 1110

On page 2, we offer the simplest possible description of the book publishing industry.

Authors reach their markets through either foreign or Canadian publishers. It should be pointed out that foreign publishers operating in the Canadian market do invest in the publication and marketing of Canadian authors. Twenty percent of Canadian-authored titles reach the public through foreign publishers operating in Canada.

Books then are distributed to market through either distributors or wholesalers. Distributors, as we will discuss, tend to be active in the marketing of books and authors, whereas wholesalers simply provide fulfilment services. The book purchaser purchases books either on-line—which is a growing part of the market—through book clubs, through independent stores, or through the chain bookstores.

A profile of the industry in Canada shows us that, first of all, with respect to book publishers, publishers select and edit the works, enter into agreements with authors or copyright holders to produce the works in printed form or in other formats, and sell the works and bear the risks involved in the cost of production.

We've offered some basic statistics of the industry in 1996-97, the most recent year for which statistics are available from Statistics Canada. The industry included 321 firms—both Canadian and foreign-owned—operating in Canada. These firms printed 10,497 new titles, of which 9,090 were produced by Canadian-controlled firms. They earned about $1.9 billion in revenues. They spent about $1.8 billion in expenses. Their before-tax profits were $77 million; the Canadian sector's were about $40 million. They employed about 7,100 full-time employees.

Book publishing breaks down into a series of different genres or markets. First of all, there are trade books, titles published for consumption by the public at large, including mass market paperbacks, trade paperbacks, and trade hardcovers, the children's market, the textbook market, and then other markets, including scholarly, general reference, professional, and technical.

With respect to ownership, both Canadian and foreign publishers operate in the Canadian market. The Canadian market is open to the importation of books from foreign markets. Canada is the largest export market for U.S. books and the third-largest market for the export of French books. Most international publishers have subsidiaries operating in Canada, and we list some of them in our brief.

New investments in the Canadian publishing industry are subject to foreign investment guidelines. These guidelines essentially try to protect the domestic industry, the Canadian-owned and -controlled industry, and ensure that it is viable, given that it produces 80% of Canadian content.

The presence in Canada of foreign publishers and the availability of imported books have a significant influence on Canadian pricing and the terms of trade for the publication and sale of books in Canada. For example, as we will note later, the price of a foreign-published book in Canada effectively sets the price for Canadian-published books in the same way that foreign magazines in the Canadian industry essentially establish a cap for Canadian magazines.

With respect to terms of trade, the terms of trade that are offered by large foreign publishers set the conditions in which Canadian publishers and distributors operate. With respect to the sale of Canadian-authored titles, about 46% of all books sold in Canada are authored by Canadians and about 72% of exports were Canadian-authored books.

• 1115

With respect to publishing and exclusive agency sales in Canada, they total about $1.5 billion, and they are broken down into the various categories: Canadian, foreign, English, and French.

Total exports were about $403 million, again broken down into Canadian firms and foreign firms, and English and French books.

With respect to language markets, obviously both an English and French language market operate in Canada. In all its cultural industries, Canada suffers from a relatively small and fragmented market, fragmented first into English and French. There are 205 English language publishers and 116 French language publishers. To give you a rough sense of the size, the English market is about four times as large as the French market in Canada. We therefore have two parallel infrastructures for the publishing, distribution, and sale of books in Canada, one English and one French.

Regarding distribution, while some publishers distribute their own books, many rely on the services of a distributor, who licenses rights to perform the services related to the fulfilment of orders, including accepting orders, shipping to retailers, and collecting payments on behalf of publishers. The revenues from the distribution of licensed books represents about 38% of the total revenues of the book publishing industry in English Canada and 41% of the revenues in the French language publishing industry.

In Quebec, distributors also fulfil a role of marketing and send sales representatives to meet directly with purchasers at bookstores and public institutions.

The Copyright Act provides remedies that were enacted—they were brought in this past October—to protect distributors from retailers buying around their exclusive licences to market books in Canada.

With respect to wholesaling, wholesalers purchase books from rights holders and then resell them to retailers. Publishers' discounts to wholesalers are typically 50% of the list price. Books are resold to retailers at 40% to 48% of list price.

Wholesalers rely on volume, specialization, and service to provide an alternative source of books to retailers and institutional buyers. The Canadian wholesale market is relatively small and accounts for a modest share of the Canadian market. The 12 members in the Canadian Wholesalers Association generate $100 million in total annual sales. In the United States, wholesalers represent a larger part of the market.

With respect to booksellers, books are sold by chain and independent bookstores, campus bookstores, book clubs, small and large ancillary retailers, such as Wal-Mart and Costco. As well, a number of them sell directly to the public.

In the current year, 1999, the top chain stores in Canada are Chapters with 311 stores, Renaud-Bray with 25 stores, and Indigo with 14 stores. This year there are approximately 4,298 independent bookstores operating in Canada, of which 450 are in Quebec and 3,848 are outside the province of Quebec.

The Internet is also a growing source of book sales to consumers. After one year, Chapters reports about 3% of their total sales being through the Internet, about $17 million.

Among the fundamental challenges to the book publishing sector in Canada is that they bear Canadian costs in the production of books, but they are capped by foreign prices.

The Canadian market operates within the larger North American market, and the U.S. is the largest book publishing industry in the world. The average Canadian print run is one-tenth the size of the average U.S. print run, so the result is that you don't have the same economies of scale in Canada as you do in the States.

Canadian publishers must price their books to compete with the prices on foreign books, and because the cost to produce a Canadian book is roughly 35% of the price set by foreign firms, once the other costs are accounted for, most Canadian books are produced at a loss. The chart indicates that for an average-priced hardcover, $30, when all costs are taken into consideration, there is a loss on the production of an average Canadian hardcover of $3.90, which is recovered from their other revenues.

• 1120

[Translation]

It should be noted that Canadian book prices are among the lowest in the world. On page 12, you'll find a comparative table of worldwide book pricing. Although clearly to the consumers' advantage, low prices represent a challenge for book publishers because they limits their ability to generate profits.

Canadian-owned publishers face another challenge, namely getting access to operating capital. Since they represent small firms, they face the problem of underfunding that small businesses of all kinds encounter. Banks are not that familiar with the characteristics and practices of the book publishing industry. For example, they impose the same requirements on this industry as they do on other firms in terms of receivables payable within 90 days, whereas in the publishing industry, publishers traditionally receive payment no earlier than 120 days on their receivables.

Financial lending institutions and banks tend to undervalue publishers' receivables as well as the value of copyright. Banks tend to assign a fairly low value to the copyright held in cultural industries. This is a problem in all industries where accounts receivable are based primarily on copyright. In the case of a bankruptcy, it is very difficult for banks to recover the money loaned if the value of the loan is based on the value of the copyright.

[English]

Copyrights are a very soft asset that is very difficult for banks to liquidate or to know what to do with in the case of a failure by a company to repay. They tend to be valued very low, and in the cultural sector you will understand that a lot of the assets are copyrights—intellectual property.

[Translation]

Canadian-owned publishers also have problems in terms of accessing equity. Profit margins within this industry are not very attractive to equity investors who are looking for a higher return on their investment. Investors aren't interested either in making small investments because of the associated administrative costs. Moreover, investors don't have a clear understanding of the value of these firms, because that value is based on the value of the copyright they hold.

[English]

So Canadian book publishing firms have difficulty accessing capital, whether it's for debt lending or whether it's investment in equity. This makes it very difficult for them to grow and to compete with very large firms in their marketplace.

[Translation]

Moving on to page 15 of our brief, where we deal with government grants and direct funding, mention is made of the Book Publishing Industry Development Program administered by the Department of Canadian Heritage. This year alone, the program provides direct funding in the order of $31.3 million to Canadian publishers. The Canada Council also oversees a program which provides funding to Canadian literary publishers and where funding decisions are made by a jury. This year, the program's budget is $7 million.

• 1125

We are also proud of the funding provided, through a partnership with the Royal Bank of Canada, to Canadian publishers under the new Loan Program for Book Publishers. Pursuant to the agreement concluded, the bank can extend an additional line of credit to book publishers, thereby alleviating some of the financing problems that I outlined earlier to you.

[English]

Under the partnership, the department effectively provides a certain protection against the risk of lending to the Royal Bank. The Royal Bank then uses its own capital to extend lines of credit to book publishers. This is a fairly innovative financing approach, and it effectively levers $2 million in federal funding in a risk reserve that's made available to the Royal Bank. It levers that $2 million into $20 million in new lending in lines of credit to book publishers.

The department is also looking at competitiveness issues. We're currently completing a study on competitiveness in the book publishing sector in Canada, and we'll try to use that study to articulate some strategies to address the difficulty in capitalization of Canadian firms.

As I noted earlier, the foreign investment policy under the Investment Canada Act limits the foreign investments in the book publishing sector. Indirect acquisitions are subject to review. That is to say, when a foreign firm acquires another foreign firm already operating in the Canadian market, that acquisition is reviewed for net benefit under the Investment Canada Act, and new foreign investment in the book trade is limited to Canadian-controlled joint ventures.

Again, under the Copyright Act there are protections for parallel importation of books. That is, buying around the holder of the Canadian licence for the book.

New technologies represent a challenge and opportunity for Canadian book publishers, just as for all Canadian businesses. On-line retailing is becoming an important source of revenue and an important avenue to reach your market. The market is fairly small in Canada, as indicated in the comments under “On-line Retailing”. According to certain estimates, the market will grow from $5.5 billion this year—this is across the economy—to a staggering $3 trillion. Books are the second-leading product being sold on-line in Canada, after computer software. On-line book retailing accounts for a fairly small part of the market in the U.S., in Germany, in France, and in Canada for the moment, but it is growing rapidly.

It's interesting to note that the value of Amazon.com is higher than that of the entire U.S. publishing industry. In Canada, roughly 3% of Chapters' sales are generated on-line, and other retailers are beginning to become active. It's also interesting to note that 63% of the dollars Canadians spend on-line are spent at U.S. sites.

New technology is also going to change how books are produced and how they are purchased by consumers. Digitization has allowed advances in publishing. It's possible that books that cost the average $30 that I noted earlier could cost $5 or less to produce when they're downloaded electronically. The e-book is coming. We read that there may be e-books, electronic books, that might be available to consumers in the very near future. These would be books that can be electronically downloaded with any number of texts. Thus far, Canadians have not seemed very interested in reading books on a computer screen, but when we have e-books that you can walk around with in your hand, perhaps that market will grow and perhaps consumer acceptance will grow.

• 1130

Another of the challenges in the Canadian industry is consolidation in the industry, both worldwide and in Canada.

[Translation]

We note on page 18 that recent mergers and acquisitions in publishing have resulted in a smaller number of multinational publishing firms in this industry. One striking fact is that Time Warner, Bertelsmann, Pearson and News Corporation, the largest book publishing firms in the world, each report higher revenues than the entire Canadian book publishing industry.

[English]

In terms of consolidation in publishing, the trends towards greater consolidation in the world are being felt in Canada. We point to two of the very large acquisitions or consolidations that have occurred in recent months: Random House and Prentice-Hall. The result is that there is a new firm that controls 20% of the book trade in Canada and another that controls 33% of the educational book market.

Large-scale corporate consolidation has not occurred on the Canadian side of the industry. There are, in fact, some disincentives to consolidation in our funding programs, and that is likely an issue that we will have to address. There is some functional consolidation. Some arrangements between publishers and distributors in Canada are improving in efficiencies, but there is not a consolidation of firms on the Canadian side. The impact on Canadian publishers is that they are at an increasing disadvantage to these very large firms operating in their markets. The large firms have very large economies of scale and scope, and they are establishing the terms of trade for Canadian firms in the Canadian market.

Another important advantage and effect for Canadian publishers is that the very large publishers operating in Canada and elsewhere in the world are able to outbid them for the services of the most successful Canadian authors. As I noted earlier, foreign publishers do operate in the Canadian market, they do invest in Canadian authors, and they do invest in bringing Canadian authors to the world. The difficulty is that it is difficult for Canadian publishers to compete to keep the very successful Canadian authors in their stable of writers and to therefore generate the profits the most successful authors will generate. They're thus at a competitive disadvantage. But it should be noted that foreign firms, like those in the sound recording industry and unlike those in the film industry, do invest in Canadian talent.

On consolidation in retail, the U.S. trend towards book retail chains and megastores such as Borders and Barnes & Noble has extended into Canada. In 1995, SmithBooks and Coles merged to form Chapters, and they now control up to 40% of the English language retail market. This year, Renaud-Bray acquired Garneau and Champigny, 25 stores in Quebec with revenues of $57 million in 1998, and they control an estimated 20% to 25% of the Quebec retail market.

The growth of large retail chains will continue to have an important impact on book publishing and book selling in Canada. Recent closures such as Duthie's Books in Vancouver highlight the difficulty for small independents competing with the larger chains. The terms of trade and publishers' decisions about what to publish will be affected by the influence of high-volume buyers. If one buyer represents 40%, 50% or 60% of your revenues and doesn't express interest in a book, you may choose not to publish it.

• 1135

On consolidation in the retail sector, opinion is divided on the effect of the impact of large book chains on the Canadian book publishing industry. Some argue that superstores have resulted in an increase in book sales, as 2.3 million people visited Chapters stores per week.

The creation of Pegasus to centralize fulfilment of Chapters stores has heightened concerns about the chain's influence and impact. Chapters/Pegasus have demanded higher discounts from publishers, which could lead to higher prices for books in Canada. And the purchasing patterns of large chains, as I commented, affect the nature and number of books that are published.

Just for your information, the Government of Quebec has created an ad hoc committee to study the challenges facing independent bookstores. Their report is expected in June.

[Translation]

As you may already know, the federal Competition Bureau recently released its report on Chapters and Pegasus and will continue to monitor events as they unfold.

In conclusion, despite the challenges it faces, the Canadian book publishing industry has achieved a great deal of success. The same can be said of Canadian authors. Ours is a dynamic, viable industry, one that nevertheless is up against some formidable challenges.

[English]

The department has been working for a couple of years on a three-point plan that was articulated in consultation with book publishers.

The first point of the three-point plan was to stabilize funding that's available to book publishers from the federal government, and it was addressed with an increase of $15 million per year in the book publishing program that was announced two years ago.

The second point in the plan was to try to extend bank lending or debt lending to book publishers, and it was addressed when the department announced last year its partnership with Royal Bank to extend lines of credit to book publishers.

The third point in the plan that we are continuing to study and will be trying to address is access to equity. Because these firms are small, are typically owner-operated, and tend to be under-capitalized, they are unable to take advantage of consolidation and are unable to invest in growth. We are therefore looking for opportunities to encourage more investment inequity in the book publishing sector.

By this point, because the three-point plan is a couple of years old, one would have to add at least a fourth point, and that would be addressing new technologies. Because Canadian firms are under-capitalized, they tend not to have the financial capacity to adapt new technologies in order to be as present in electronic commerce as they will have to be. Perhaps that's a fourth point that needs to be added to our three-point plan, but that essentially has been the department's strategy in responding to the challenges in the book publishing sector over the last couple of years.

[Translation]

I'll stop on that note. I will be happy to answer your questions, as will my colleagues who are far more knowledgeable than I am.

[English]

The Chair: Thank you, Mr. Stephenson.

[Translation]

As per our agreement, we'll begin with Mr. de Savoye. Then we will go to the Liberal side. I have a request from Mr. Wilfert. Then I will go to Ms. Lill, followed by Mr. Muise, before going back to the other side.

Mr. de Savoye.

Mr. Pierre de Savoye (Portneuf, BQ): Thank you for your excellent presentation. Congratulations to the people who put this material together over the weekend. You must be accustomed to working weekends, because you did a fine job. Your presentation is comprehensive and highly informative. Nevertheless, I do have a number of questions for you, precisely because you have piqued our curiosity somewhat.

I have several questions which I will put to you in sequence, after which you can respond.

• 1140

First of all, publishing is an industry under both provincial and federal jurisdiction. The provinces are responsible for marketing, whereas the federal government is responsible for controlling foreign investment and competition. Perhaps you could explain this distinction further, for the benefit of committee members. Perhaps you could also talk a little about the provisions Quebec has put in place with Bill 51. From a marketing standpoint, the industry in Quebec is subject to a number of guidelines.

I appreciated the charts comparing the French language and English language markets. However, on pages 3 and 4, you do not provide a profile of the industry broken down by language. Is such a breakdown available? If so, perhaps you could get that information to the clerk who could then circulate it to all committee members.

Now then, on to rather more delicate issues. You mention on page 5 that the Canadian publishing industry is subject to foreign investment guidelines. I'd like to know what these guidelines are and what steps you take to ensure that they are in fact followed.

Furthermore, on page 17, you state that many Canadian publishers lack the financial resources to adopt new publishing technologies. This situation is potentially very serious. What options are available to you? One can imagine the consequences of failing to react to this changing environment. We would be swept off the map. However, at the same time, are there opportunities for new publishers to burst onto the scene as a result of this new technology, perhaps by using more basic technology? Are there opportunities for new, never-before-published authors to get their works published at minimal cost? In short, we may be seeing a new approach to retailing, and we mustn't focus only on traditional ways and complain about problems adapting. We must also look at what we didn't do in the past, and at what we can do today in this sector which is likely to expand considerably over the next five or ten years, or maybe even sooner than that. Try, if you can, to give us an overview of this situation.

The Chair: Perhaps we should give the witness a chance to respond.

Mr. Pierre de Savoye: One last question, and that will be all. Regarding industry trends, you said that things weren't going very well, but what exactly is the message that you're trying to convey to us? What action are you recommending we take?

Mr. Don Stephenson: I will try to answer your questions one at a time. Some of my colleagues will likely have to help me out.

In terms of how programs are organized at the federal and provincial levels, first of all, let me say that culture is a shared jurisdiction and programs have evolved somewhat in a parallel, complementary manner in most cases. The federal government's involvement is not limited to regulating foreign investment. It is also involved in programs to assist creative talent, writing, production and book distribution, much like the Quebec government is. There is no clear division of responsibilities between the federal and provincial governments insofar as this industry is concerned.

As for Bill 51, maybe one of my colleagues could review this Quebec legislation briefly for you. We cannot provide a detailed overview of provincial policy. That is for our provincial colleagues to provide. Maybe we could get back to this later.

• 1145

As for the charts on pages three and four, I think we could provide some figures for the French language or Quebec market. We can forward them to the committee after this meeting, if you like.

As for applying the provisions of the Canada Investment Act and for monitoring the activities of foreign firms operating in Canada, last June, the department took over responsibility for administering the Canada Investment Act. This was formerly the responsibility of Industry Canada. The activities of every firm that makes investment in Canada and takes on certain obligations are reviewed annually. We plan to carry out an annual review of the activities of all of these firms.

Mr. Pierre de Savoye: Excuse me for a moment, Mr. Stephenson.

Mr. Don Stephenson: Yes.

Mr. Pierre de Savoye: You say you plan to do an annual review. You're talking about doing so in the future.

Mr. Don Stephenson: That's correct.

Mr. Pierre de Savoye: You haven't done that in the past?

Mr. Don Stephenson: We took on this responsibility barely twelve months ago.

Mr. Pierre de Savoye: And this was formerly Industry Canada's responsibility.

Mr. Don Stephenson: In the past, Industry Canada conducted an annual review. As I understand it, it was standard procedure.

Mr. Pierre de Savoye: As you understand it.

Mr. Don Stephenson: That's right.

Mr. Pierre de Savoye: Thank you.

Mr. Don Stephenson: As for the challenges facing the industry and how we should address them, first of all, in terms of equity investment, perhaps we could come up with ways of promoting private investment in this sector. In the past, tax credits have been offered to promote private investment in some sectors of the economy. The Canadian publishing industry is suggesting that similar tax credits be offered. We haven't yet considered all of the options. We've only recently received the first draft of the study on industry competitiveness and we plan to look to this study to come up with several options to present to the minister for her consideration.

Regarding the establishment of new publishing firms, I fully agree with you that our programs should allow for, and even encourage, wherever possible, the arrival of new players on the scene. With all of the opportunities afforded us by online retailing, the face of the industry is poised to change a great deal. Our programs, most of which are structured on the basis of how the industry used to operate, mustn't prove to be an impediment to these new firms.

With your permission, I will ask my colleagues to provide some additional details.

The Chair: Very briefly, please, because we must give the others an opportunity to ask some questions.

Mr. Allan Clarke (Director, Publishing Policies and Programs, Department of Canadian Heritage): If I understood the question correctly, you would like some additional information about Bill 51.

Mr. Pierre de Savoye: With your permission, Mr. Chairman, perhaps we could come back to this later.

Mr. Allan Clarke: I can leave some information with you about the legislation, rather than give you a verbal explanation.

The Chair: Fine. Can you pass along that information to the clerk? Thank you.

[English]

Mr. Wilfert.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Mr. Chairman.

I thank you for your overview of the industry.

I have three areas I would like to briefly touch on. The first one is obviously the issue of cultural identity, decision-making, and control of the industry, whether it be in the area of marketing, distribution, or publishing. You did outline a couple of things that certainly would concern me.

• 1150

Educational books are controlled 33% by Pearson of the U.K. In terms of the educational market, when you think of making sure the message, especially to young people, is a message that is by Canadians and for Canadians.... Recently the ministry of education in Ontario suggested they were going to have educational books such as history done by foreigners, i.e. Americans, for distribution in the schools. It certainly would be a concern to me. I would be curious to know if there are other types of consolidation in the educational market besides the 33% you identified with Pearson.

On the competition side, obviously the issue of Chapters and the market share they now have is of concern. I have very little faith in the Competition Bureau. Having spent nine months on a committee that dealt with the gas industry, the Competition Bureau doesn't have a very warm spot in my heart. I do notice a trend, though, in the book industry similar to what I see in the grocery industry and the gasoline industry in terms of independence. That is a trend I think we as a government have to more than just monitor, which the Competition Bureau has been doing for about the last six months; it continues to monitor. That is a major concern. When you see the independent market drop from 50% to 30%, I think it's something that should alarm us all, particularly in terms of who's controlling the market in terms of distribution, dealing with publishers, etc.

There is the fact that companies like Britnell in Toronto, a long-standing independent, which I used to use for years—and I knew the owners quite well—went under in part or in large measure because of those types of pressures. And you mentioned Duthie's Books in Vancouver. That I think is a concern. I would be interested in any response from the Competition Bureau under Industry Canada, and I'd like to know what role the Department if Canadian Heritage is playing.

The area that seems to be a relatively silent issue, which you've touched on and I think is one of great concern certainly in the long term for Canadians, is new technologies and the fact that the Canadian publishing industry doesn't have the resources or the financial resources. I don't know what role we can play as a government, but I think we have to be very concerned about access and information in terms of this industry, whether it's on-line retailing or whether it's digital, where Canadians in the future are going to get the resources in terms of knowledge. What role can we play?

You mentioned the financial or the banking sector. I was very interested in that area. I wonder if you can elaborate to some degree on whether there are proposals to look at some options to assist the industry. That could be a back door for foreign consolidation, foreign control. We see Microsoft making alliances. I would describe myself as a cultural nationalist, and I obviously have a great deal of concern about those kinds of things. I think those are issues I would like to see addressed by the department.

The Chair: Mr. Stephenson.

Mr. Don Stephenson: With respect to educational book publishing, first of all I would like to comment that Pearson, which does control 33% of educational book publishing, did make public undertakings in relation to their investment in Canada. In particular, they did make commitments to the production of certain minimum amounts of Canadian content in each of the categories of books they publish.

Second, it is perhaps at least some comfort on this issue that the content of educational books tends to be established not by publishers but by educational authorities. They establish the standards for the curricula, and it's against those standards that publishers then try to produce the best, most cost-effective materials for teachers. So to a large extent the content is dictated by educational authorities.

With respect to the competition side of issues, the Department of Canadian Heritage of course has no role in the review by the Competition Bureau.

• 1155

With respect to what actions ought to be taken either by the Department of Canadian Heritage or by the government more generally, I think we first have to establish more clearly what the impact is of consolidation of concentration of ownership in retail, in distribution, in wholesaling, or in publishing. Ultimately our objective is Canadian content, Canadian-authored books reaching Canadians. We would have to be certain what the impacts of these changes in ownership are on content reaching Canadians before we made an intervention, in my view. The—

Mr. Bryon Wilfert: Could I ask what would facilitate that?

Mr. Don Stephenson: I think we have to study the issue more. I think we have to do actual studies to look at the output of all segments of the industry before and after consolidation and whether or not it's having a real impact on the production of Canadian content and access to that Canadian content by Canadians.

Mr. Bryon Wilfert: Are those studies going on, or are they going to be contemplated?

Mr. Don Stephenson: Yes, they are being contemplated.

The Chair: [Inaudible—Editor]

Mr. Don Stephenson: No, but these are issues we do talk about in our policy discussions and these are studies that—

Mr. Bryon Wilfert: I'm interested in action, not talk.

Mr. Don Stephenson: Indeed. I have nothing to report to the committee today in this regard, but these are issues we are concerned about and will be looking into.

Mr. Bryon Wilfert: Can you get back to us in a very timely fashion? We'll be resuming in February. I would hope by then you'll have at least reviewed it and talked about it and studied it to the point where you can get back to us with something more definitive.

Mr. Don Stephenson: I could report our work plan once we have a definitive work plan on the issue.

The Chair: Ms. Lill.

Ms. Wendy Lill (Dartmouth, NDP): Thank you for coming. This is a huge load of material to try to absorb in a short time, and I certainly haven't done that. But my understanding of the immediate reason why we're talking to you and others today is because of the whole fear around Chapters and Pegasus and the impact that is having on the independent publishing and bookseller industry. So I want to ask a couple of questions around that.

You're basically in research mode. You're studying the impact of consolidation and retail and distribution. Our object, as you say, is Canadian-authored books, Canadian content books.

I must say, just from dealing with Bill C-55 in May, I was very concerned that the whole concept of Canadian content took a big hit. It changed from Canadian content to original content, and I want to note that at that point it no longer has to be written by a Canadian; it simply has to be original to the market.

I'm wondering if in your wisdom you are looking at such important changes that will have a huge impact on magazine authorship, which we know has a major flowthrough to book publishing.

I want some idea of this. We're hearing from the Canadian Booksellers Association and they're very concerned that they're going to see an enormous number of closures of independent booksellers. We've already seen it go from 50% to 30%, and there are job losses. There is the whole business of how Pegasus and Chapters are getting preferential treatment on book distribution and price discounts.

How can they ever survive? We will be asking them these questions, but you in Heritage, as you know, have a very important role as a partner in maintaining a healthy Canadian industry for booksellers and publishers. Surely this must be an enormous worry to you. What are you going to do about it? What are we going to do about it here in this room?

• 1200

Mr. Don Stephenson: It would be the same answer I provided a moment ago, I think. The first thing we're going to try to do is understand it.

We have to understand the impact of fewer independents and more large stores, which is a story that goes across the economy. It's not exclusive to book publishing. It's not exclusive to the cultural industry. We need to understand the effect this change in the structure of the marketplace will have on the production of Canadian content and its reaching Canadian readers.

A related question, I suppose, is what will be the impact on the diversity of Canadian books—that is to say, the number of Canadian authors who are able to reach a Canadian market. Until we understand that better, I think it would be difficult to intervene, and perhaps inappropriate.

Ms. Wendy Lill: You know, just before you used the word “diversity”, I wrote it down. I was reading a book on the WTO, a citizen's manual. In it, David Suzuki was quoted as saying that basically it's all about diversity, about protection of diversity in every way. We have to protect diversity in order to guard against getting wiped out. If you end up going in one direction, you no longer have any options.

For the life of me, I can't see how diversity is going to be protected if we are moving towards the conglomerate, and probably globalized, distribution and selling of books. I just don't understand how those two things equate.

That's perhaps just a statement at this point, but if any of you have any comments or would like to give your own perceptions on it, I'd appreciate it.

Mr. Don Stephenson: We certainly share the concern and want to understand the issue. I don't think we're in a position to conclude anything with respect to the impacts of these changes, and certainly not on what kinds of interventions from government would be appropriate.

The Chair: I have a request from Mr. Shepherd and then Mr. Bonwick. First, however, I want to express on the part of both Mr. Wilfert and Mrs. Lill that, as I understand it, what is missing there is the feeling that these studies will be carried out soon. It was left very loose.

Could you carry it back to the department, then, that if the studies, according to you, are the key element to producing action in the future, we feel they ought to be carried out soon?

Mr. Don Stephenson: I would be pleased to bring that message back to the department.

The Chair: Thank you.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Thank you very much.

I'm a novice in this area, so you're educating me, but I have one small observation. First of all, on this business about studying, it seems to me we're studying an industry that's really in transition. Some of the things we're concerned about, such as job losses, are going to happen. That's a natural thing. It's what's happening with technology today.

I wonder what the Investment Canada Act really does relative to the fact that 53% of the book publishing industry, as I think you said in your statement, is foreign-owned. I'm not quite sure what real purpose it has. I mean, presumably the original purpose was to ensure that there was some kind of majority ownership in Canada, but that's failed. Maybe you can address that process.

My major concern is with these huge market forces that are upon us, not just the pure supply and demand of market conditions but also the technological revolution that exists. It seems to me that what we want to do, if we agree on the importance of maintaining an indigenous Canadian process, where writers can get their stories out to Canadians, is find a way to use that new technology and put it on our side.

• 1205

Now, I don't know what that is, and I don't know where that process goes, but maybe you're looking at some type of massive clearing system that allows Canadian writers to get their books digitized, say, and out into the Canadian marketplace.

It seems to me that some type of new instrument is missing. Let's not just try to fix some of these old ones that are obviously failing.

Mr. Don Stephenson: Perhaps my colleague can address the second question, but on the first, I would suggest that the Investment Canada Act and the current policy in the book publishing sector under the act, which was introduced in the mid-1980s, was not to ensure majority Canadian ownership of the entire industry but to arrest a process that was occurring at the time—that is, increasing foreign ownership in the sector.

At that point in time, they wished to ensure that no further losses of the Canadian-owned sector occurred. They imposed the guidelines under the Investment Canada Act that all future investments in the publishing sector would have to be in Canadian-controlled joint ventures so that at least 51% control would in fact remain in Canadian hands and no further losses would be incurred.

With respect to how we embrace new technologies, I think we have to adapt our programs to do just that.

Perhaps my colleagues would venture a comment.

Mr. Allan Clarke: I don't think I would necessarily characterize the current state of the industry, or even government intervention, as a failure. I think we have a very strong and dynamic book publishing industry in Canada. Most Canadians know many Canadian authors, and you can get Canadian books anywhere you want. They're widely read and widely available.

That doesn't mean to say we're not facing challenges. The presentation outlined some of those challenges, including just the cost of doing business in the Canadian market, or access to financing and equity. Those are challenges we're trying to deal with in terms of how we administer our programs and how we introduce new policy initiatives. We're facing new challenges as well, obviously, with respect to new technology and also changes in the marketplace. The marketplace evolves and changes much like it does in some of the other industries.

We do keep track of what's happening, but there's not necessarily agreement between everybody on what the impacts of these changes are, either. So while consolidation is an issue that we're following and are concerned about, there's not necessarily agreement, even within the industry, on how these changes are affecting how they do business.

On the one hand, some people might suggest that a company like Chapters or Indigo are providing more books to people, or more outlets—many people go to Chapters, and they sell a lot of books—but on the other hand, it's clear they are having an effect on the health of independent booksellers. We still have to wrestle with that to figure out exactly what we can do to try to alleviate some of that concern and some of that impact.

With respect to new technologies, we also have to try to deal with what are the best strategies for helping publishers adapt to these new technologies. It's probably safe to say that Canadian publishers, because they face certain financial difficulties vis-à-vis their foreign competitors, may not really have all the resources necessary to take advantage of these new technologies.

So those are things we want to deal with and address, certainly.

The Chair: In the interests of time, I would request that Mr. Bonwick and Mr. de Savoie, and of course the witnesses, be brief. Then we can close this session, break for lunch, and give a good chance to the next witnesses.

Mr. Bonwick.

Mr. Paul Bonwick (Simcoe—Grey, Lib.): Thank you, Mr. Chair.

• 1210

To the department officials, first of all I'm going to try to get you to provide me with a clear understanding of what we're discussing today. Are we discussing ways, as the Standing Committee on Canadian Heritage, in which we might assist and protect a sector within our Canadian culture? Or are we discussing a way in which we might assist or protect a private sector or private sector companies whose role is to either publish or distribute Canadian books and other books to achieve maximum profitability in a free market society? Which one are we doing? Or is there some combination in between?

It's relevant to the book publishers as well as the booksellers, so I'd be interested in getting your take on that.

Mr. Don Stephenson: Our concern for the viability, the financial health, of Canadian companies in the book publishing sector is only a means to an end. Our concern is for the production of Canadian content in books. If the strategy for achieving a high level of Canadian content in books is to ensure we have viable companies—publishers, distributors, retailers—then that's simply the strategy.

Mr. Paul Bonwick: My next question would be, in turn then, do you believe Canadian-owned book publishers and Canadian-owned booksellers would more assist in publishing a Canadian author or in distributing a book printed by a Canadian author than perhaps a foreign-owned company would? Is the bottom line not always the bottom line? The Canadians are the same as the foreigns, in so far as they're there to achieve maximum profitability, so they're going to carry whichever ones are going to sell or publish whichever ones are going to sell.

Mr. Don Stephenson: As I commented earlier, 80% of Canadian-authored books are published by Canadian-owned and -controlled firms.

Mr. Paul Bonwick: How does that compare with other countries? For example, what percentage of books in the U.S. are published and authored within the U.S.? What about the U.K. or France? How do we compare?

Mr. Allan Clarke: I don't know if we have that, but anecdotally, yes, there's a lot of foreign ownership or foreign activity in the Canadian market, probably more so than in some of the other markets in the world, maybe because of our proximity to the American market, which happens to be the largest exporter of cultural products in the world. We share a common border and sometimes even a common economy. So yes, there is more presence in Canada, and that's certainly one of the challenges we have to face.

Mr. Paul Bonwick: Where I'm heading with this is, if I can appreciate or understand that by trying to find creative ways to support the Canadian book industry in the form of Canadian-owned publishers and Canadian-owned booksellers, it's going to assist Canadian authors in getting their stories out to Canadians, more so than foreign, then it's good discussion. If the foreign-owned book companies are coming in and going to provide the same service, then I have difficulty. That's what I'm trying to come around with in saying, are we trying to find ways to subsidize by virtue of a private sector company within the Canadian economy? That's where I'm asking you to help me.

Mr. Allan Clarke: That's a hard question, but there is and there has been, in all the cultural industries, a correlation between ownership and content.

Mrs. Lill mentioned Bill C-55 and some of the things we had to do to try to deal with levelling the playing field. We were not asking foreign publishers to produce Canadian content. What we were trying to do in that case was have an economic equation. Their advantage came from not producing any content for the Canadian market, and they could just effectively dump their advertising into the Canadian marketplace. What we were trying to do in that case was level the playing field.

In this case what we're trying to do is make sure people can produce Canadian content. It's the Canadian publishers that are overwhelmingly producing that content, and they have historically done that. Prior to the existence of a viable Canadian publishing sector, there weren't a lot of Canadian books being published, but there were still foreign publishers operating in Canada. It was the growth of the Canadian publishing sector that resulted in the growth of Canadian publishing and the publication of Canadian authors. There's been a lot of success in that area.

• 1215

[Translation]

The Chair: Mr. de Savoye has withdrawn his question. We'll stop there. Thank you to our witnesses, Mr. Stephenson, Mr. Clarke and Ms. Curran.

A brief question, Mr. Bélanger.

Mr. Mauril Bélanger (Ottawa—Vanier, Lib.): I have a question for the departmental representatives, but they may not be able to answer it immediately. Did the changes to the Copyright Act arising from Bill C-32, which we all recall, create unexpected problems for the book publishing industry when they were actually enacted? That's what the Canadian Booksellers Association is arguing.

Mr. Allan Clarke: The provisions respecting parallel importation were not designed to regulate the market, but simply to provide remedies to people who owned copyright.

[English]

The changes in Bill C-32 with respect to parallel importation simply provided to distributors or people who owned copyright or had contracts to license the distribution of books in Canada remedies they did not previously have to deal with people who bought around them. They weren't designed to regulate the market or to change the market, but if I were a publisher or distributor or I had the contract to distribute a book in Canada, I could take action against people who did not respect my contract.

Mr. Mauril Bélanger: I understand that. The question was, are there unexpected incidents as a result of that legislation, things we had not foreseen?

Mr. Allan Clarke: My answer would be no, because anything that could happen now could have happened before the introduction of Bill C-32, or the introduction of the regulations at least. With respect to any type of dominant player or changes to contracts, it could have happened before or after the passage of Bill C-32.

Mr. Mauril Bélanger: Thank you.

[Translation]

Thank you, Mr. Chairman.

[English]

The Chair: Thank you very, very much to the witnesses. We're going to adjourn the meeting for fifteen or twenty minutes for lunch. As I say, the lunch is there for members of the committee, the staff, and the witnesses first. If there's any food left, by all means, the members of the public will be invited to participate as well.

• 1218

• 1238

The Chair: Let us resume our meeting so we can give our guests a chance to have enough time to tell us their story.

We are very pleased to welcome from the Canadian Booksellers Association, Mrs. Sheryl McKean, who is executive director, and Ms. Jean Barton, who represents a firm called Books on Beechwood. Also, we have Mrs. Mary Jane Maffinni, from Prime Crime Books. It sounds very enticing.

Ms. McKean, the floor is yours.

Ms. Sheryl McKean (Executive Director, Canadian Booksellers Association): Thank you. I might add that Mary Jane Maffinni is also an author.

On behalf of independent booksellers of this country, I want to thank you, Mr. Chairman, for deciding to take a look once again at the future of the Canadian bookselling industry.

Ladies and gentlemen, my apologies for not having our presentation available in both official languages. I too was working all night to have this here and time did not permit. I would be delighted to provide it at a later date if you'd like.

The Canadian Booksellers Association represents over 1,300 booksellers in Canada. Our members include trade and campus stores, small independents, independent chains and superstores, and urban and rural retailers. In addition, the association has over 350 members made up of publishers, distributors, and wholesalers. Our members are located from Dawson Creek, British Columbia, to Yellowknife in the Yukon, to Goose Bay in Labrador, Newfoundland.

• 1240

The CBA is in a unique position. CBA bookstore members put Canadian literary culture into the hands of Canadians directly, daily, and face to face in a way no other part of the industry can, and certainly no other retailer can.

Like many other sectors of the economy, Canada's bookselling business has undergone tremendous changes in the last 10 years. Technological innovation has affected every stage of our business, from writer to reader, including publication, marketing, distribution, and retailing. These changes are significant enough to justify a close examination by parliamentarians of the legislation and regulations in place in order to ensure that they still respond to public policy objectives. It is important for parliamentarians to understand that since 1994, when the government allowed the creation of Chapters through the merger of SmithBooks and Cole's, independent booksellers have faced extremely difficult circumstances and, in our opinion, unfair competition.

Independent booksellers' circumstances are now being made worse; in fact, their very existence is being threatened with Chapters now in a position to dominate the book distribution market through the creation of Pegasus Inc., their wholesale distribution arm. Pegasus is 82% owned by Chapters.

These changing factors threaten to alter not just the face of Canada's book sector, but also the cultural diversity it has come to represent. We are therefore extremely pleased that you have initiated this examination to ensure that legislation and regulation still respond to public policy objectives.

With this in mind I will focus on six basic points, three of which have particular cultural dimension.

Our first concern is market control. Independent book retailers are extremely concerned that one dominant chain is driving out many small to medium-sized businesses. We believe Chapters' market dominance and control affects discounts, terms of trade, and distribution. It affects creators, producers, retailers, and, most importantly, Canadians and our culture.

To determine market control, we must examine market structure not only horizontally, at the number and size of retail outlets, but also vertically, up the supply chain at the wholesale and distribution level. The consequences of market control in any sector include diminished competition, job losses, diminished public access, decline in customer service, and less tax revenue.

In the United States this kind of market dominance has been expressly limited. In fact, this past summer the Federal Trade Commission acted to block a merger that would have threatened competition in the American book retail market. In the U.S. market there is more than one dominant player, therefore less concentration of power than in the Canadian market.

Canadian booksellers need at least the same kind of competition protection afforded to American independent booksellers. They need the same kind of support that fosters their ability to compete and their ability to continue serving Canadians the same way they have for many, many years. Market control gained through concentration of power is not good for Canada's bookselling community or the Canadian public.

The second issue is anti-competitive behaviour. Beyond the structure of the industry, policy-makers have good reason to inquire into the actual business practices taking place in a given market. Chapters' majority ownership of Pegasus wholesale will give it direct control of book distribution channels to independent bookstores, placing Chapters in a direct conflict-of-interest position.

Pegasus is in a position to provide Chapters with preferential treatment on ordering, pricing, promotion, and delivery. In addition, independent booksellers' proprietary information may not be secure.

• 1245

Imagine that you're the biggest bookseller in a very big country. You have people in your head office ordering books. Suddenly, as your competitor's information becomes available, you have the benefit of thousands of experienced, knowledgeable people ordering for you. Now you know what to order for specific regions, where your experience may be weak. It's an opportunity to increase sales and improve ordering practices. It's a way to evaluate markets and target promotions. It's a way to beat the competition.

As competition is eliminated, there will be fewer small stores serving small and rural communities. This is the sort of anti-competitive behaviour that only Chapters, through Pegasus, is capable of.

Unregulated competitors is our third issue. The last 10 years have also witnessed the arrival of electronic commerce and the expansion of other retail businesses such as Wal-Mart and Price Costco into the bookselling business. Some of these new players may be able to avoid full Canadian regulation that's giving them a competitive advantage over traditional Canadian booksellers.

Our fourth concern is access to Canadian authors. The Canadian government is fully committed to encouraging and promoting Canadian authors. That means ensuring that Canadian authors are not only published but also that their books reach as many Canadian readers as possible through as many retail outlets as possible across our country. Theirs is the voice of Canadian history and Canadian culture.

Let me share the comments of a major Canadian publisher, who stated, “If Chapters doesn't order it, then we aren't going to publish it.”

We believe that independent booksellers in Canada who establish relationships in their community and with their customers, independent booksellers who hand sell a new emerging author, are responsible for the success many previously undiscovered Canadian authors now enjoy.

All Canadians should be concerned when they are denied access to an author because one retailer will not choose that author's work. This certainly is a form of censorship.

The fifth concern is points of cultural dissemination. Many booksellers occupy a special place in a community or a neighbourhood along with the local branch of the public library. A bookstore is a natural focus for the exchange of information not only about books and authors but also about related cultural events such as lectures, conferences, course offerings, even other community activities. The need for as many points of cultural dissemination as possible is clear in small and rural communities, or ethnic neighbourhoods especially.

The bookstore is often the cultural and social centre. It offers a place for all types of Canadians of all ages and in all income levels to participate, share information and ideas, and to learn and develop the all-important understanding of their heritage. As such, bookstores are the owner-occupied lighthouses on the cultural shores of this country. Their disappearance would be a tragedy.

Our final issue is limited distribution channels. Amendments to the copyright law and book importation regulations compound all of the above-mentioned problems. Revisions to the Copyright Act contained in Bill C-32 in the associated book importation regulations purport to permit exclusive distributors to derive the full benefit of their distribution contracts by reducing the practice of buying around. The regulations provide some guidelines on delivery obligations and price controls to which an exclusive distributor would be subject.

In light of the launch of the Chapters-controlled Pegasus as a national distributor, we believe these amendments accentuate the possibility of an undue influence imposed by Chapters. According to copyright law, when Pegasus holds exclusive distribution rights, independent booksellers will be forced to buy imported books from their largest competitor. This is fundamentally wrong.

Mr. Chairman, these are the issues we hope the committee will address. We are not asking to be protected from competition. On the contrary, all we are asking is that we are protected from unfair competition and that the policy rules governing our industry take into consideration the need for and value of independent booksellers.

• 1250

Thank you, Mr. Chairman. We would be delighted to answer your questions.

The Chair: Thank you very much, Ms. McKean. Your appearance here will help us obtain a very important perspective on this issue.

[Translation]

There are a few things I'd think I should explain to committee members. As you know, our committee passed a resolution requiring that all briefs submitted to us be translated. Either yesterday or the day before that, we received the submission entitled Six Key Reasons Why the Government Should Be Concerned by the Chapters Acquisition of Pegasus Wholesaler Inc. We immediately arranged to have the document translated. Today, Ms. McKean has elaborated further on this paper. That explains why her latest submission has not been translated. However, all of the main points mentioned are included in the document that has been translated. I just wanted to explain that to you.

Moving on to questions, Mr. de Savoye.

Mr. Pierre de Savoye: Ms. McKean, Ms. Barton, Ms. Maffini, thank you for enlightening us as to the problems faced by the book publishing industry. The members of the House of Commons are familiar with this issue, given the adventures with Ginn Publishing. We realize there's a problem, but together with the departmental officials who preceded you, you have shed some light on the extent of the problem and the urgent nature of the situation. My first question deal precisely with the urgent nature of this matter.

Earlier on, departmental officials advised us that a study needed to be conducted to determine the appropriate action to be taken. My one concern on listening to you is that if we wait too long to act, we won't be doing a study at all, but rather conducting an autopsy. Just how much time do we have to act on this matter?

[English]

Ms. Sheryl McKean: Not long enough.

Pardon me. My French is not good enough for you to understand, I'm afraid.

It's a very urgent matter. While we understand the workings of the officials who were here, we're here to say, because it's such an urgent matter, how can we help? What can we do? This has to be dealt with, and it has to be dealt with now, so we want to be a part of that process and we want to make sure everyone understands the importance of the matter and the timing of the matter. So yesterday is not soon enough.

[Translation]

Mr. Pierre de Savoye: Unfortunately, yesterday isn't an option any more. Under the circumstances, how much time will it take to develop and implement a plan of action? Would six months be too long or would that be an acceptable timeframe? Would nine months be acceptable? Realistically, how much time do we have to implement a plan of action? Before we can actually go ahead an implement such a plan, we need to conduct the study and, prior to that, someone has to go ahead and order a study. Let's suppose we decide tomorrow to conduct a study. Do we allow ourselves four months or six months to complete that study? Even then, we will still need time to implement any proposals. What kind of realistic timeframe are we talking about here?

[English]

Ms. Sheryl McKean: It's a very difficult question, but in view of the closings that were mentioned here earlier—Britnell's bookstore is a very well-known store, as is Duthie's in Vancouver—I would say within six months, if we had something to deal with. In other words, I know there will probably be more attention paid to this matter in February.

So if we thought February, March, or April, and we were getting organized so that something could happen within the six-month timeframe, that would definitely help our sector. There's no doubt about it. I would hate to see more fine stores closing, and they are almost daily. And when we're reduced from the 50% to the 30%, we could be 20% this year and then nothing next year. That would be logical.

• 1255

[Translation]

Mr. Pierre de Savoye: Ms. McKean, when you read your submission, you skipped over a paragraph which appears somewhat important to me. I'd like to focus for a moment on this paragraph.

You observe

[English]

that the creation of Chapters Pegasus may be a way for Chapters to circumvent the restrictions of the book importation regulations.

[Translation]

Are you telling us that the creation of Pegasus was one way for Chapters to do indirectly what it couldn't legally do directly? Is that what you're telling us?

[English]

Ms. Sheryl McKean: That was my belief at the time and that's why that's in there. I didn't have the correct documentation with me to be able to say to you, there it is. So I didn't want to say it.

But yes, that is my belief. There are different rules for wholesalers and retailers.

[Translation]

Mr. Pierre de Savoye: Are you recommending that we examine this matter further to find out if indeed this is the case and if so, take steps so that it doesn't happen again? We're seeing some adverse effects that we wanted to avoid. Are you suggesting that we look into this matter further?

[English]

Ms. Sheryl McKean: I would suggest that is definitely a good idea. The more we know about anything and everything that's happening in this sector is a good idea. I would say as well that it would not be our purpose to penalize all wholesalers because of this situation, but no other wholesalers are owned by the biggest competitor in the industry. So this is a unique situation.

[Translation]

Mr. Pierre de Savoye: Thank you, Ms. McKean. Thank you, Mr. Chairman.

The Chair: Thank you very much. You have raised a number of important questions.

Ms. Bulte, followed by Ms. Lill.

[English]

Ms. Sarmite Bulte (Parkdale—High Park, Lib.): Thank you, Mr. Chairman.

Thank you very much for your presentations.

I guess I'm concerned about what the role of this committee and the Department of Heritage is in bringing this matter before us.

The role of this government, I think, is to ensure that there is Canadian content, that there are Canadian-authored books, and that we reach Canadians, which is something that has been part of the cultural policy of this government and successive governments—to ensure that the creative process is fostered and that the infrastructure is put in place to ensure that creation be showcased, be it a book or theatre, whatever.

My concern here is, what evidence do you have that there is a lack of Canadian authors, or fewer Canadian authors, in Chapters? If I walk into Chapters, I can find Merilyn Simonds. I can find Jane Urquhart—not just Jane's latest novel, but all of her novels. Not only is there a Canadian section, but when you walk in, the floor is Canadian books—that's what I'm going into.

I read here that you say that all Canadians should know that they will be denied access to an author because of one retailer. What evidence do you have to substantiate that?

Then, with your other comment here, that we will be forced to buy imported books from their largest competitor, I don't know what you mean. What imported books, and from what competitors? Could you elaborate on those two things for me?

I think this is a question for the industry committee to look at. We are concerned that we have Canadian books, that we have more Canadian authors, and that there be greater distribution channels for Canadian books—absolutely—and we'll do anything we can to help that.

Where is the evidence that there isn't this access to Canadian books?

Ms. Sheryl McKean: Let me take your first question first. Hopefully, I have a quick answer, and then I'll ask my colleagues to comment.

With respect to authors, when you're the dominant bookseller in the country, you control over 50% of the market and you have two or three people in a head office in Toronto ordering. Those two or three people don't have the point of view for choosing a book.

Publishers have stated publicly that they will not publish a book if Chapters doesn't buy it, if Chapters doesn't order it. So immediately, if those few people in that one city, that one office, don't order that book, it's not going to get published. Whereas, we have people who perhaps live in the communities where the authors are, perhaps share a different perspective or care about what happens in Cape Breton Island or wherever, so they will choose to buy that book. That creates the interest at the publishing level, and the book is likely to be published.

• 1300

As the independent booksellers are eliminated, they won't be there to place those orders as it is, because their market position has declined. The publishers are not necessarily producing the books, because Chapters won't buy them.

I know you have another question, but I'd like to let my colleagues comment about authors, and then we could go to your other question. Thank you.

The Chair: Ms. Barton.

Ms. Jean Barton (Co-Owner, Books on Beechwood): There's an old proverb to the effect that you shouldn't put all your eggs in one basket, which is happening very quickly. The fewer independents there are, the fewer outlets or decision-makers there are to disseminate Canadian material. If there's one buyer buying everything, then we're going to have a very homogenized market.

The Chair: Mrs. Maffinni is an author. It would be interesting to hear her viewpoint.

Ms. Mary Jane Maffinni (Co-Owner, Prime Crime Books): I'd like to answer the question from two points of view. One is owning a specialty bookstore in which we sell crime, and that is genre fiction or popular fiction, a type of fiction that I think more people read, actually, than literary fiction. You should be aware that last year every single first novel by a mystery writer in Canada was published by a small press. Not one single one was picked up initially by Chapters. Many of them will vanish without a trace. That's Chapters' choice.

If we are there to provide an alternative to this and to support, as we do, people who are being published by small presses, to give these people chances to come in to meet audiences in various communities, then I think we provide a balance in the literary landscape in Canada. That's what we're asking for, our fair chance to be there and do this.

As an author, if you saw my book in Chapters, it is because I had to go personally into every Chapters store here and suggest that it should be there and that it was a local book. They were completely unaware of it until I did that.

The Chair: Ms. McKean, could you tackle the second question?

Ms. Sheryl McKean: We would be compelled to buy from our largest competitor.

Ms. Sarmite Bulte: Why imported books?

Ms. Sheryl McKean: It's based on the definition of “exclusive distributor”. That means there is a Canadian entity that distributes books from the United States and from the U.K., and the term used is “exclusive distributor”.

Because Chapters has launched Pegasus, Pegasus could very easily become an exclusive distributor. I mean, how tough could it be? They only need to approach a U.S. firm, for example—that's an easy one—and say we control over 50% of the market through our retailers, so either give us exclusive distribution rights or we don't handle your book. When they gain exclusive distribution rights, our own law, the amendments to the copyright law through the parallel importation regulations, compels independent booksellers to buy from Pegasus, which is owned by Chapters.

The Chair: Could I hear from Ms. Lill?

Ms. Wendy Lill: I'm interested in the thought that if one sees Chapters sort of in the same big-bulk, high-volume way that one would see, for example, McDonald's, a lot of communities are just way too small for those to go to. So what happens to the thousands of communities in this country that now may have a little bookstore, but their bookstores will dry up, because in your scenario there will be fewer bookstores? These places will conceivably not have bookstores because Chapters would not go into them. I am concerned about that.

I'd like you to talk a bit more about the big-box store phenomenon in the bookselling industry and give me some examples of why you don't think that's a good thing. As you know, an awful lot of people seem to love it. So let's hear the downside of that instead of simply the consumer-driven upside.

• 1305

Ms. Sheryl McKean: To answer your second question first, we're not proposing that there not be big-box stores. We think fostering a diversity for Canadians—choice—is a wonderful thing. There are people who will love a big-box format and people who won't. That's okay.

Our objection is to the concentration of power in the hands of one retailer and only one. Unlike McDonald's, there are no others. When you look at 350 compared to 20-odd, and then the next competitor having 14, that isn't a comparison. Certainly when you think of McDonald's, there are more Wendy's, Harvey's, and Burger King restaurants.

When you look at the situation of small communities, we're very concerned about the issue of competition on two levels. Clearly it's self-serving to be concerned if you're a bookseller and a Chapters opens on your block. That's competition. But any bookstore that opens on your block is going to be competition. Our true concern is of the bigger issue; that is, what one dominant player with a concentration of power can do to the entire marketplace. What they can do is wipe out bookstores everywhere.

I spoke last year with Judith Drinnan who owns bookstores in Yellowknife. I remember that in my naïveté at the time I said I guessed she was not as worried about the Chapters issue as other members. She said “You have to be kidding. Do you know what's happening to my discounts and my terms?” She said “They could put me out of business and I'll never see one within miles of here; it's just fatal for this industry.”

Ms. Jean Barton: The more Chapters demands—greater discounts, free freight—the more pressure there is on the publishers to increase the price of books, which we, as independents, pay the penalty for.

Ms. Wendy Lill: I wonder what the final outcome will be for the consumer two or three years down the line, after all these bookstores have dried up and we have Chapters from coast to coast, possibly. What is your thinking on what that will mean for the consumer in terms of diversity, in terms of price of books, and in terms of Canadian authorship?

Ms. Sheryl McKean: In terms of diversity, there will be little to none. In terms of Canadian authors, there still could be little to none. But really, there isn't likely to be Chapters from coast to coast because, as you point out, they're not going to go into many communities. They won't be of interest, so those communities will be without books.

Would you expand? I've lost the essence of your question.

Ms. Wendy Lill: I think you did answer it. I was trying to get at the impact.

The Canada Council is here, and I know the Canada Council fights mightily to get Canadian writers out there and started and thriving. Yet if places like McClelland & Stewart—I don't know whether that's who said it—are not going to publish things Canadian because Chapters won't buy them, then I'm sure it certainly sends a chill through everyone's heart in this room.

Ms. Sheryl McKean: If you were to look at author appearances around the country, you would see how important it is for independent booksellers to stay alive, particularly for new and emerging authors, those who maybe no one else wants to have in their store, but maybe they live in that region or something, so that particular bookseller will support them and have them in.

I believe our members, independent booksellers, have a proven track record of making obscure Canadian writers into superstars. That's essential. I can't even begin to tell you the number of authors' stories I've heard, about their different types of experience in a large commercial organization versus a small independent where someone hand sells, where someone has read their book, where they're introduced by someone who has done research into who they are, and someone who has drummed up the interest in the community. From my understanding, it's a totally different experience.

The Chair: Mr. Bonwick.

Mr. Paul Bonwick: Thank you, Mr. Chair.

• 1310

There has been some discussion with two or three of the members with respect to our role, and I was leading into it with the last member. I see our role as legislators and parliamentarians as a very simple one, and yet it's absolutely critical with respect to our so-called Canadian identity. Most simply, we have an absolute responsibility to ensure that Canadians have an opportunity to read Canadian stories. If we don't accept that responsibility, I think we close our books and go home today—and it bothers me that we don't have members of Reform here today participating in the questioning as well.

I'd like to identify a couple—

Ms. Sarmite Bulte: They're sleeping.

Mr. Paul Bonwick: They're sleeping—or getting prepared for questions tonight.

I'd like to provide an observation, first of all, and then a couple of questions. My observation is that we should be passing along to the Minister of Industry some direction or some concerns relating to the Competition Bureau.

I watched with some fascination as the FTC exercised its authority, and, more importantly, not just its authority but its—this word is critical—responsibility to ensure that there is a competitive environment within the U.S. market. When they exercised that authority, that responsibility, they blocked the merger.

My observation over the last couple of years has been that our counterpart, the Competition Bureau, has been a more superficial agency, more observation than enacting or exercising its authority and in turn its responsibility for the job it's there to do.

I think it would warrant some discussion, at the very least, that we consider passing along our concerns to the Minister of Industry, that he review their mandate and in fact their exercise and control in cultural matters. Quite often what ends up happening is they get caught up in some of the broader issues—or issues that they feel are broader, in larger-scale industries—whether they be gasoline or automotive and things like that. Sometimes the cultural matters, which are equally if not more important, get sloughed off to the side—that's my feeling, at least.

Coming back to Canadians having access to Canadian stories, do you have the information as to what portion of total book sales within these independently owned stores are sales of Canadian books versus foreign? In turn—and I don't know if we have access to this information with this panel—in regard to the Chapters of the world, what portion of their total book sales are Canadian books versus foreign books?

The Chair: Sheryl McKean.

Ms. Sheryl McKean: Sadly, that's not a number I have. However, I can guarantee you that it's one I would like to have, because I'm fairly confident about what it would tell us. It's one that I will seek to have, and I can also guarantee you that as soon as I get it, you will have it.

Mr. Paul Bonwick: Can you pass it through to the clerk or the chair? He'll make sure it's distributed accordingly.

Ms. Sheryl McKean: I'd be happy to.

The Chair: Are you searching for that information yourselves?

Ms. Sheryl McKean: Yes, we are. There is a great deal of information about our industry for which we, along with a number of other people in Canada, are searching. In our case, we're a not-for-profit organization representing booksellers who in some cases have stores that are less than 500 square feet, so our revenues and resources available for study and research are extremely limited. It is a project that we would like to see jointly conducted by industry and government, perhaps, and hopefully we'll come up with a good plan for that.

But immediately—because we talked moments ago about timing—we are doing everything we can to get the best numbers we can. We'd be delighted to share those with you.

The Chair: Thank you.

I have two requests, from Mr. Shepherd and Monsieur Bélanger.

Mr. Shepherd.

Mr. Alex Shepherd: We've had a lot of discussion about Chapters. I have a suspicion that Chapters doesn't buy books unless they can sell them and I suspect that your people don't buy books unless they can sell them.

To what extent are you concerned about the way business is changing? The word you never mentioned here was “Amazon.com”. It seems to me that is Chapters' main competitor. So it's not on the level of a small local bookstore.

• 1315

I live in a rural area. In fact, I live on a farm that's nowhere near a town. On my computer, I can buy a book from Amazon.com or I can buy one from Chapters. I suspect that if the people from Chapters were here, they would tell you that because of this they can offer more variety, that they can actually bring in more Canadian books and offer them to a wider distribution of people who need them.

To what extent is your concern really to do with the way business is changing as opposed to a concern about how Chapters is operating?

Ms. Sheryl McKean: To answer—

Mr. Alex Shepherd: In other words, people are purchasing over the Internet; we know there's a ballooning industry there. People say that's where you have to be. It seems to me that if that's where you have to be, you're where it's not, so how do you reckon...? To what extent does your concern in being here today and the concern that some of your people are facing in fact have more to do with technology and the way the technological revolution is taking over people's buying behaviour than it has to do with the vertical integration of Chapters and Pegasus?

Ms. Sheryl McKean: The technological aspect of this situation is a part of our concern, but only a part, just like any other business development has been a concern, an issue, a challenge. When people went from using cash boxes to cash registers and then to computers, our industry had to adapt. Our independents had to adapt, just like anybody else. This is a part of doing business and it's a part of doing business that we are also involved in. Many independent booksellers have e-commerce websites.

When you're next at home on your farm, you might go to cbabook.com to buy that book, because that's our association site, which provides access for independent sellers on the web.

It's only a small part. It's a technological development that we're embracing. I don't think we're where it was. I think we're where it's at. We want to be where it's going to be and that's why we're here today.

Mr. Alex Shepherd: How much of the wholesale market does Pegasus now have? What percentage of the Canadian wholesale market would they now have?

Ms. Sheryl McKean: I honestly don't know, because I focus more on our business. However, I do know that they are not being used by most independent retailers, that they are, to the best of my knowledge, primarily, if not exclusively, supplying Chapters stores.

Mr. Alex Shepherd: But you raised the issue that your people would have to buy from Pegasus.

Ms. Sheryl McKean: That's right.

Mr. Alex Shepherd: Only for imported books? Is that what you're saying?

Ms. Sheryl McKean: If they have exclusive distribution rights for imported books, yes, that's right.

Mr. Alex Shepherd: So in other words, you have a choice within the Canadian market now as to who you use as a wholesaler.

Ms. Sheryl McKean: At present, however, again we have the situation where Pegasus is in a position where it is commanding, if you will, over 50% of the market of distributing even Canadian author titles.

Mr. Alex Shepherd: But that 50% of the market is because of their connection with Chapters. It has nothing to do with you.

Ms. Sheryl McKean: Absolutely.

Mr. Alex Shepherd: It has nothing to do with your industry at all—

Ms. Sheryl McKean: No.

Mr. Alex Shepherd: —because you're buying from someone else.

Ms. Sheryl McKean: But if they're the only people who are distributing the books at a certain point, because they control over 50% of the market we'll have the choice of either going to them or not selling the book.

Mr. Alex Shepherd: Can you buy from them? Do they restrict access?

Ms. Sheryl McKean: No, they don't restrict access to our members. We could buy from them.

The Chair: Monsieur Bélanger.

[Translation]

Mr. Mauril Bélanger: Thank you, Mr. Chairman.

[English]

I'd just like to try to narrow it down, if I may. I attended part of your annual general meeting last year in Toronto and had a chance to talk to some people. There's a grudging acceptance among some of the independent retailers that, yes, the Chapters book retailer came in and shook up the industry and it's not all bad. When we had our national caucus meeting in Halifax, I went to one of the oldest independent retailers in Canada and talked to the people there, and they also recognize it. Yes, they've brought in certain amenities in their store because of the competition.

I don't sense that this is where the source of the preoccupation is coming from. My sense is that it's more from your intervention in May, which is directly related to Chapters creating Pegasus as a wholesaler, wholly owned—well, not wholly owned, but 82% owned. That's what I'd like to focus on.

• 1320

I've read the letter sent to you by someone at the Bureau of Competition. They've dismissed the comparison to the U.S. on the basis, if I recollect, that in the States it was a fusion, an amalgamation, whereas here it's basically Chapters setting up something new.

It would be useful to have a sense...well, we did get a sense of what the wholesaling sector is in Canada, but the presentation we had from our officials was that there are twelve members of the Canadian Booksellers Association, and that together they generate approximately $100 million in annual sales, which is not much compared to the industry. Is there a dominant player, pre-Pegasus, in the Canadian wholesaling network?

Ms. Sheryl McKean: No, there's not. Bear in mind as well, however, that in Canada, unlike in the United States, publishers sell a lot of their own books. So where there's a middleman more often in the United States, it's been less so in Canada.

Mr. Mauril Bélanger: Okay, but there isn't a dominant wholesaler?

Ms. Sheryl McKean: No.

Mr. Mauril Bélanger: So I suppose people could argue then that what Chapters is trying to do is set one up because it couldn't buy one. Would you agree with that reasoning or that train of thought?

Ms. Sheryl McKean: Sure. For what purpose? That would be my question.

Mr. Mauril Bélanger: Okay, that's where we get into the difficulty, Mr. Chairman. We need perhaps to explore this sort of thing in greater detail with whomever.

Do you have a sense right now of what percentage of the retail market Chapters has? I'm hearing it's over 50%. Do you have a sense of what it is?

Ms. Sheryl McKean: Yes.

Mr. Mauril Bélanger: Would you be prepared to share that with us?

Ms. Sheryl McKean: Yes. It's my understanding it's 55%. I get that number from publishers with whom I have conversations. They say, “This is how many books we're shipping to them.”

Mr. Mauril Bélanger: Okay.

I've heard and I've read that the publishers are getting squeezed.

Ms. Sheryl McKean: Yes.

Mr. Mauril Bélanger: I'd like to have some elaboration. I know I'm going to run out of time very shortly, so I'll just say what I'm looking for. How are they being squeezed and what's the effect? Is Pegasus, i.e. Chapters, trying to corner the market of book publishing or the availability of books by squeezing so hard they could almost get exclusive distribution from Canadian publishers as well?

Ms. Sheryl McKean: Yes.

Mr. Mauril Bélanger: That might become a little tricky, and then I understand why you're buying from your own competitors.

The final thing that I think, as a committee, we may wish to explore, is if we do accept there's a concern and a problem and it's growing, what are the remedies? Should we recommend, and to whom, that no dominant player in retail can also be a dominant wholesaler? Perhaps that is the avenue, or that exclusive arrangements with Canadian publishers are to be banned. In my opinion anyhow, we have to be coming to grips with some mechanism, some actual action, that would prevent a collapse, if you will, or a domination, of our book industry, for want of a better term, in Canada.

I've run out of time, so I'll just leave this with you and our guests.

Ms. Sheryl McKean: Well, that's why we're here. We're here to ensure there's a fair competition framework in Canada, and we're here to suggest that we revisit parallel importation regulations.

With respect to publishers being squeezed, we're told regularly that publishers are being told by Chapters, “We represent this amount of your business; therefore you give us this deal. We want this, this, and this.” And they're getting it.

I know for a fact that publishers are receiving threatening letters. They're being coerced into dealing with Pegasus. It's very difficult for us, because we get the information and yet officially don't speak for publishers. They have their own associations, but those publishers' associations are caught as well, because their members are in this squeeze. How do they come and protest about their largest customer, only to have that backlash when they return to their offices? It's a very difficult situation for everyone.

• 1325

We're looking for help. We've come here today bringing into our presentation other sectors of our industry—publishers, wholesalers, distributors, authors—because it is an industry-wide issue. We truly represent the booksellers, and the booksellers are concerned for the industry and for Canadians.

The Chair: Thank you.

Before we break up, I want to ask members to consider something. When we questioned the ministry about studies, we just didn't get an answer as to when this would happen. Is it going to happen next week, in a month, in three months, in five months? We just don't know. It will be a very protracted process, given the way departments have to work. That's no blame on anybody, but that's the way it is.

I checked with the clerk. I think we have enough funds in hand until March 31. Do you want to have one or two consultants to work on looking at this issue in broad perspective on both sides of the issue, so that in February, when we start again, we have some independent information from the researcher, Mr. Jackson, helped maybe by some experts, to give us a briefing document to start with in February?

Mr. Mauril Bélanger: Yes.

Mr. Paul Bonwick: It would be extremely helpful. The information provided to date has been biased, to a certain extent, on both sides, so an independent perspective and some fact-finding would be helpful. At this point a lot of it has been verbiage rather than actual presentation of letters and statistics, so we're somewhat at a disadvantage without seeing that kind of information. With the responsibility we have, it's critical that we do that.

[Translation]

The Chair: Mr. de Savoye.

Mr. Pierre de Savoye: It would be unfortunate if, after listening to two presentations that were extremely fascinating in many respects, there was no follow up of any kind. I think your recommendation is very much in line with the approach we must take.

The Chair: If a committee member would like to move a very brief motion authorizing our clerk and Mr. Jackson to follow up on this matter, we could then go forward with this.

Mr. Mauril Bélanger: I so move, Mr. Chairman.

The Chair: We're agreed then

[English]

that we have consultants help Mr. Jackson, within the funding available to us, to do a fact-finding study to follow up on the issues we have heard today?

Some hon. members: Agreed.

Ms. Wendy Lill: I'd just like to make a point. Mauril came up really quite at the very end of the event with—

Mr. Mauril Bélanger: I was the last to speak.

Ms. Wendy Lill: He was the last to speak, but in a way, the whole reason we were here had to do with Pegasus and that extra layer it has just added to the pressure cooker of book publishing and book selling. So I just want to make sure that continues to be front and centre if you're doing research. We see the possible unfair competitive impact that's having, and I just think it's important that that doesn't get lost in the mix.

The Chair: No, it won't.

Thank you very much. We really appreciate your appearance here.

The meeting is adjourned.