HERI Committee Report
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CHAPTER SIX: CONSIDERATIONS FOR THE FUTURE
From the material presented in this report on the growth and impact of the Internet, one can already see some of the larger changes brought about by entrepreneurs able and willing to exploit the potential of a new technology. These types of changes -- coupled with the growth of book superstores -- have upset the traditional dynamics of the publishing industry and will no doubt continue to do so for the next few decades. Furthermore, these changes will create a climate where many smaller, independent bookstores will face an increasingly competitive business environment.
Beyond the impacts of ongoing changes at the level of book distribution and retailing are some other technologies in development that will have impacts that can only be guessed at. Four of these technologies merit discussion. These are: books on CD-ROM or DVD, electronic books, printing on demand (POD) and the development of personal electronic agents for online shopping.
This chapter discusses the above items and their potential implications for the future of book distribution and sales. It then discusses the overall health of Canada's book industry before turning to a brief examination of the challenges of technological change. In closing, some final thoughts related to costs associated with this report's recommendations are presented.
A. ONGOING TECHNOLOGICAL INNOVATIONS
Text that is prepared on a computer can be stored as a digital file. This digital file can be used to print a book or it can be transferred to a disk and sold for use by someone with access to a computer. While few novels have found their way onto CD-ROMs, a great many reference works have. In fact, one can now buy every issue of publications as diverse as The National Geographic, The Canadian and World Encyclopedia and Mad Magazine on CD-ROM or DVD (Digital Video Discs). CDs are attractive because they can store vast amounts of information and can include sounds and pictures. They can also be searched very quickly. These attributes make them ideal for reference works. They also can be updated regularly and take up less shelf space than most dictionaries. CDs are also extremely cheap to manufacture.
Books on CD and DVD have been available for just a few years. Young people are more familiar with them than most adults and find them attractive and easy to use. The growth of the market for these types of products could very well lead to changes in the publishing, distribution and retail sales of reference materials. For example, the Encyclopedia Britannica no longer publishes a bound, paper edition. Instead it is offered in the form of an annual subscription over the Internet. Other reference materials, such as dictionaries, encyclopedias, indices and textbooks are likely to undergo similar changes. For this reason, it is not hard to imagine a specialised Web site offering a subscription to dictionaries that are updated regularly.
As more "books" are offered over the Internet, the sale of traditional books through traditional retail outlets could decline. Carol Givner's book Bing, Bang, Boom, was recently the first e-book to make the crossover to the shelves of the American bookseller, Barnes & Noble. Similarly, Steven King recently released a short story that was available only over the Internet, which sold several hundred thousand copies in its first week. For Jack Romanos, president and CEO of Simon and Schuster, these events represent a turning point for the fledging e-book industry: "Soon we'll be viewing e-books as just another form, like audio books and paperback."149
The ideal electronic book would be approximately the same size as a traditional book. Since most computer monitors, however, are not as clear or well-lit as a "traditional" page, they are often difficult to view for extended periods. For this reason, if electronic books are to gain widespread consumer acceptance, existing display technology limitations need to be overcome. However, for the purposes of this discussion it is not necessary to predict when this will happen. It is only necessary to note that it will likely happen sooner, rather than later.
The adoption of the electronic book will be another source of change in the distribution of books. In theory, electronic books could be sold as small "chips" or disks that are inserted or downloaded into a personal "data-pad." In either case, it is possible that the sales will not take place in traditional bookstores. This will represent an additional change that will nibble away at the survival of traditional bookstores.
If a book exists in the form of an electronic file, then it is possible to print one copy for a single customer. The means to do so at a reasonable price already exist. There are two ideas about how printing on demand might develop as a commercial enterprise. In one scenario the book is ordered (e.g., via the Internet or by telephone) printed at a distribution centre (e.g., a warehouse) and mailed to the person who ordered it. In the second scenario it is printed on demand and delivered to a nearby bookstore.
Printing on demand is likely to have at least two major impacts. First, it will make publishers' back lists more attractive as they will be able to sell copies of books without a major print run.150 Second, it will probably have a positive impact on larger stores that can share the necessary warehouse equipment costs, or in one or two branches of the store in a particular town. If printing on demand helps publishers and larger stores, it will probably have a negative impact on smaller stores unless they develop co-operative mechanisms that allow them to offer the same quality of service, or themselves use the services of a large distributor.151
Although price comparisons have always been possible, a person's ability to negotiate a price has often been limited by distance, time and negotiation costs. An Internet-based, electronic personal agent, or shopper, has few of these restrictions. Thus, just as someone might use a real estate agent for help with the purchase of a home, one can imagine the evolution of an electronic shopping agent that searches for items of interest and identifies the most attractive price. Indeed, Web sites that provide such price comparisons already exist (e.g., bookbot.com, DealPilot, and mySimon).
The creation of personal electronic agents -- described as shopping 'bots' or 'shopbots' -- is already feasible and a field trial is currently being carried out in England.152 Personal electronic agents will radically transform electronic commerce. One observer, Steve Juretson, an American venture capitalist, has gone so far as to suggest that, "Amazon.com is an anachronism."153 If true, it is quite likely that personal shopping agents will lead to further changes in the distribution and sales of books, with the largest impact being reduced margins for retail stores.
B. THE HEALTH OF CANADA'S BOOK INDUSTRY
Although it is difficult, if not impossible, to make detailed predictions about the future of book distribution and retailing practices in Canada, it seems clear that there will be considerable change. And this change will require existing businesses to adapt.
Canada's complex system of public support to the arts and culture was not forced upon the country. Canada has a complex system of support to arts and culture because it deals with human needs as fundamental as those involved in medical care or the legal system. All humans have basic needs for food and shelter, but they also have social needs for belonging and affection as well as individual needs for knowledge and self-expression. Thus, the arts -- and the culture they are part of -- may for many represent a profound fusion of needs for belonging, affection and self-expression.
Books, the subject of this study, are a marvelous example of the diversity of human needs, wants and interests. It makes little sense to say that someone needs a book to repair a car, but only wants a book of poetry. In a fundamental sense, both purchases are made because of a human need.
The interplay of all these factors is studied under two broad topics: economics and marketing. Economic considerations were discussed in Chapter Three (distribution).154 This section looks at marketing issues.
In its 1999 report, A Sense of Place -- A Sense of Being this Committee highlighted the importance of marketing in the ecology of arts and culture in Canada. As pointed out, in a complex society composed of millions of people, modern marketing is a necessity. Canada in the year 2000 is not the Montreal or Toronto of 1850.
One-hundred and fifty years ago, the business of printing a book was relatively straightforward. This was a period when many books were sold on a subscription basis -- with the price of the book and the print run calculated on the basis of pre-sales. As George L. Parker explained:
Publishing books by subscription had been around for centuries, but this practice enjoyed such a vogue and took on such vigour in the [eighteen]seventies and eighties that it helped transform traditional publishing and bookselling. ... Subscription publishers cut their overhead costs and increased their profits by ignoring the booksellers and distributing either through the mail or by canvassers and agents ...155
Thus, since there was a small market and literacy rates were much lower than today, advertising was a simple matter of getting an author to talk about the book or perhaps printing some handbills and passing them out.
There are several different aspects of the marketing of books. First, most books are still sold in stores and so stores themselves engage in marketing activities to attract customers. Second, books, while a physical product, are not exactly the same in the minds of the reader. A fan of Leonard Cohen may be eager to buy his collected poetry, but have almost no interest in a new translation of Beowulf. Thus, the reputation of the author can be important, making a long established author such as Michael Ondaatje or Roch Carrier easier for a publisher to promote than someone who is publishing their first book of poetry.
Marketing of books is further complicated by the habits of book buyers. Slightly more than 50% of the population buys books. However, some people buy only a few books a year and some buy books mainly as gifts for others (e.g., during the Christmas season). The run-up to the Christmas season (which begins in the fall) is critical to the ongoing viability of publishers and booksellers. Without the profits generated in the last quarter of the year, neither publishers nor booksellers would remain in business. In response to questioning before the Committee, Mr. Larry Stevenson said:
In three of four quarters, nobody in the book retail business makes money; they make their money in the Christmas quarter. You have to use the full year. ... Chapters Retail, every year, has made money.156
A third complication is found in the fact that a small percentage of the population buys the majority of books. Also, a surprising percentage of book purchases are made on impulse. For example, a customer may enter a bookstore just to "browse" and purchase several books. Surveys of customers leaving stores routinely find that upwards of 60% of book purchases are spur of the moment.
Traditionally, there were several simple considerations for bookstore owners. They located a bookstore where there was a lot of foot traffic to attract browsers. In addition, there were special attractions (e.g., an author signing books), collections and other devices to draw attention to particular titles (e.g., a table or bookshelf of current bestsellers).
Although all of these factors continue to be important, the development of information technology (see Chapter Three) has facilitated two notable changes -- the box store (sometimes called a category killer) and the capacity of people to purchase books online.
Large stores with as many as 100,000 titles can attract customers who know in advance that there will be many titles of interest to them. Large stores can also offer seats in front of a fireplace, a coffee shop, Internet connections, working space, gift items, washroom facilities, pay telephones and free parking. In this way a large store can become a destination. Because a majority of book purchases are made on impulse, this is an important advantage.
The recent emergence of large stores and the sale of books over the Internet have fundamentally altered the marketing challenge for smaller bookstores. One of the biggest innovations in the book industry in the 1990s was the ability to order books over the Internet. As the first player in the field, the U.S. company Amazon attracted many Canadian book buyers, a development noticed by Canada's larger players, who soon set up competing online divisions, including Chapters.ca, Indigo.ca and Renaud-bray.com.
Conventional retail finds itself increasingly in competition for business as more consumers make purchases over the Internet.157 As can be seen in Chart 6.1 below, books, together with recorded music and computer software, have emerged as the three most frequently purchased online items.158 Industry observers estimate that eventually, up to one-fifth of book sales will be made over the Internet.159
To date, most Internet booksellers have not been profitable, although Amazon reports that its book division achieved profitability in the fourth quarter of 1999.160 Chapters Online, meanwhile, expects to have positive cash flow by the end of 2001.161 The profitability of Canadian Internet booksellers will depend on their ability to gain home ice advantage by taking market share from Amazon and other foreign Internet booksellers. It will also depend on the growth of Internet use by Canadians.
With respect to the last point, accurate and up-to-date figures are difficult to find. The phenomenal growth of the Internet can make information out-of-date within months; Internet access is available in homes, schools, libraries and at work, which means that it is not just those who have paid for an Internet connection at home who have access to the Internet and who are potential customers for Internet-based booksellers.
Available survey data from the Household Internet Use Survey for 1998, for example, show that 45.1% of Canadian households have a personal computer (up from 39.8% at the end of 1997)
Statistics Canada also notes the strong relationship in the survey between income and Internet use and between education and Internet use. Given that book buying is also positively linked to income and education, one can see the stimulus booksellers have to set up Internet sales divisions.
Thus, location, special attractions, a niche and loyal customers are more important than ever. However, history, tradition and loyalty are no longer much of a defense. For example, John Smith and Son the world's oldest bookseller (founded in 1751) in Glasgow Scotland, announced in April 2000 that it was closing. As Willie Anderson, the current managing director of John Smith's explained: "the store couldn't compete against book superstores and Internet discount shopping."162
Many of the changes discussed in this report will occur in a gradual manner as young Canadians who are more familiar and comfortable with aspects of modern technology than their parents seek access to Canadian-authored materials. Younger Canadians are much more likely to use a personal electronic shopping agent than their parents and are more likely to agree, in time, with the notion that "Amazon.com is an anachronism." Even if they do not agree with Steve Juretson they may make a much larger percentage of their book purchases (CD-ROM, DVD, subscriptions and information searches) electronically. Thus, it is possible that the future use of the Internet for "book" purchases will be much higher than the 15-20% currently envisioned by some observers. This in turn will make it difficult for small independent bookstores to survive. However, whether this will have an impact on the availability of material written by Canadians, is unclear.
From the evidence presented in the testimony before the Committee and the archival information made available by agencies of the Government of Canada, it is possible to come to a few conclusions about the current situation.
To date the merger of SmithBooks and Coles has not reduced the
availability of books in general or Canadian-authored books in particular. The available
evidence indicates that the number of
Canadian-authored titles has remained relatively constant -- at approximately 5,000 per
year -- and that the sales of these titles have increased slightly over the past 5 years
(see Chapter Two).163
Some of the concerns expressed to the Committee relate to broad issues of technological change and would be cause for concern even without the existence of Pegasus or Chapters. If Chapters did not exist, then Indigo would, and if Indigo did not, then Amazon.com would still be a growing force to be reckoned with. Of course, in the French language market the forces of change, represented by Renaud-Bray, are unrelated to Chapters.
Another point is that all of the witnesses who appeared before the Committee have suggested that the Government of Canada has an important role to play in helping the industry to adapt.
While the Committee's members cannot claim to be experts on the industry, several considerations strike us:
- The industry itself is fragmented and does not have an association that represents all the players, either in French or English. This is a cause for concern because many of the issues raised in testimony before the Committee can only be addressed by all of the players in the industry. Government can help, but without a spirit of co-operation, government support will likely be much less effective than it might otherwise be. The importance of such an approach by the whole industry informs much of what follows.
- While the Committee is aware of the challenges facing government, it remains convinced that the federal government and its agencies need to respond more astutely and quickly to emerging problems. If one thing is evident from the work on this topic it is the fact that we no longer have the luxury to spend years designing a program that remains fundamentally unchanged for 30 years. Those days are past.
- A tidal wave of change is upon us and unless we act speedily many of the cultural gains from the last 30 years of support will rapidly disappear.
C. THE CHALLENGE OF TECHNOLOGICAL CHANGE
There is some dispute about the potential of the Internet and e-commerce. According to Mr. Karl H. Siegler, policy chair of The Literary Press Group of Canada:
In the end, all books.com sites will fail because of their hybrid nature -- they are all based on the old "bricks and mortar" distribution model inappropriately inserted in a completely virtual technology that they are in profound structural conflict with. E-commerce sites based on the amazon.com model are like concrete malls built in the middle of the electronic highway. They have no business being there. They just get in the way.164
That being said, the Committee notes with interest a recent United States Department of Commerce study reporting that the Internet and high-technology industries were responsible for at least a third of that nation's growth from 1995-1998.165 It seems apparent, therefore, that the Committee would be remiss to pretend that the Internet or e-commerce is merely a passing fad. The next section addresses four areas where it is felt the Government of Canada can help or take action.
Traditionally, the government has supported the production of books with some modest assistance to associations and marketing. In the Committee's view, there needs to be concerted support to other segments of the industry.
One issue raised by witnesses was the importance of doing something about returns. It is probably impossible to eliminate returns in the short-term. However, they are a significant problem and cost for publishers, distributors and retailers.166
Once a book has been printed, it is sent to the publisher's warehouse. When a publisher receives orders for a book, it is sent to a wholesaler or a retail bookstore. Since the Depression of the 1930s, publishers guarantee the sale of every book printed. In most cases, wholesalers and retailers can simply return any unsold book to the publisher for full credit -- paying only transportation and handling fees.
Thus books, unlike most items for sale (e.g., refrigerators) can be returned to the publisher within one year if they have not been sold. There are two main "seasons" in the book industry, the spring and the fall, which includes Christmas. In general, unsold books that have been shipped from the publisher in the fall season will be returned the next spring.
Returns vary by the type of book. Returns also vary by the type of retailer. A large chain store might average 30% returns while a small specialty store might have returns of 15%. Returns from Internet sales (e.g., by Chapters.ca or Indigo.ca) are much lower and in theory should be almost 0%. This is because "virtual bookshelves put every book on display and allow true demand to drive the supply network. Indeed, Amazon.com returns only about 3% of its orders -- about one-tenth of the traditional return rate."167
Returns are a serious problem for the book industry since they are costly for everyone who has to handle them. Publishers build the cost of returns into their financial planning and often budget for 30% returns. The uncertainty of returns, the costs of handling them and the inefficiencies involved, increase the costs of all books. Since we know that consumers are sensitive to book prices, these inefficiencies have the ultimate effect of reducing the consumption of books.
It is almost impossible to predict how many copies of a book will be sold. This makes it equally difficult to predict returns. For these reasons, reducing or eliminating returns will require substantial work on the part of the industry -- particularly publishers, distributors, wholesalers and retail operators -- if it is to become more efficient.
In spring 2000 Chapters' returns were down from 1999's 32% to 30% overall.168 It is therefore realistic to imagine further reductions in returns over the next five years to levels in the range of 20% to 25%, as more efficient industry sales-tracking strategies are developed.
Two recommendations on returns are presented later in this chapter.
A crucial element in reducing returns is timely sales data and better sharing of information among publishers, wholesalers and retailers. Ideally, the key industry stakeholders should know for every title, how many are in warehouses, in trucks, in stores and how many were sold as of yesterday. With this information stores could tailor orders to projected sales, publishers could print or reprint more precisely and the industry as a whole would benefit.
In Chapter Two the Committee addressed the importance of cultural statistics and necessary improvements to those statistics. There is an important distinction to be made between archival data and the up-to-date information necessary to run a business. Regrettably, the information to run a modern competitive retail book system is not available in Canada. In this respect, Canada lags behind England and the United States.
A number of suggestions were made to the Committee about measures to address this situation. The Department of Heritage pointed out that it is working on a cultural observatory, Statistics Canada said it was willing to work with others and the Association of Canadian Publishers suggested the Department of Canadian Heritage could be the locus for more work.169
In the Committee's view these initiatives and proposals do not address the need for immediate information. The only group that can address this need is the industry as a whole. Unfortunately, as noted earlier there is no single association that involves all of the key players.
For this type of information sharing to occur, publishers, distributors and retailers have to have the information to share. In general terms this is done through Electronic Data Interchange (EDI). Unfortunately it requires everyone in the supply chain to invest in the necessary computer hardware and software.
A recommendation on timely information is presented later in this chapter.
In Fast Forward, Accelerating Canada's Leadership in the Internet
Economy, the Canadian
E-Business Roundtable reminds its readers that the Internet is:
more than a tool for buying and selling. It is a way of providing rich, often customized information about organizations, their products and their services. It facilitates information sharing between companies and their business partners, as in the case of automated inventory control systems or collaborative design systems. Moreover, for purveyors of information, goods and services, it is a channel that broadens their research well beyond the confines of traditional organizations operating in the offline, physical world. Together with e-commerce, these online activities constitute the broader realm of e-business.170
In light of these considerations, the authors of Fast Forward believe that "Canada is well-positioned to be a leader in the Internet economy, given its sophisticated infrastructure, its highly connected population and its early Internet policy initiatives." Indeed, as can be seen in table 6-1, it is estimated that Canada, in 1998, had the highest share of global e-commerce revenues after the United States and Western Europe.171
Therefore, despite the fact "Canada has been surprisingly ...
slow to embrace e-commerce" and trails the U.S. "in both business-to-consumer
and business-to-business e-commerce," the report's authors believe that Canada's
infrastructure advantages, highly connected population, strong e-business policy
framework, and relative responsiveness of its citizens to the Internet, position it well
for ongoing growth in electronic commerce and sales. The authors of Fast Forward
estimate that
"... Canada's Internet economy would represent $156 billion by 2003. This could
translate into annual GDP growth of approximately 0.6% and more than 180,000 new
jobs."173
As the Internet increases in importance for retailers, including
independent booksellers it will be necessary for industry players to adapt. The Committee
recognises that the cost of participating in
e-commerce can be substantial. The Committee, however, is convinced that the Canadian book
industry must deal with the opportunities presented by the very recent appearance of
e-commerce. Two recommendations dealing with aspects of e-commerce are presented later in
this chapter.
This period of rapid change represents an opportunity for the Canadian book industry to make available a vast stock of out-of-print titles. As mentioned earlier, it is now possible to print a single copy of a book on demand. For printing on demand to be economical, one needs a large library of digitized materials. It costs approximately $100 to digitize an out-of-print title, however, no single Canadian publisher is likely to do so unless everyone else does so, too.
As Ms. Jacqueline Hushion, Executive Director of the Canadian Publishers' Council stated in a letter to the Committee:
Eventually, all books published will be produced (in parallel) -- available simultaneously in print and electronic form or online. In the interim, publishers will want to digitize portions of their backlists that represent titles that sell consistently in good quantity each year. They may, for the sake of their corporate archive, wish to digitize their entire catalogue. They will need some assistance to do so174
For this to happen, work has to be done on a number of topics related to protecting intellectual property. These include the Digital Object Identifier (DOI), open standards for e-Book publishing, and the management of digital rights (DRM).175 These initiatives will require support from the Government of Canada, in particular in the area of copyright, which this report has already addressed in Chapters Three and Four. Work on the standards will also require financial support for people in the book industry to implement protocols and system components.
2. Strategic Steps to Strengthen Canada's Book Industry
The Committee believes that given the number of complex and inter-related issues involved in improving books returns, obtaining timely sales information, meeting the demands of e-commerce and digitizing publishers' backlists necessitates a significant and concerted effort. Accordingly:
The Committee recommends that the Department of Canadian Heritage establish a five-year technological transition program to strengthen all segments of the Canadian book industry. This must include authors, publishers, distributors, wholesalers, marketers, retailers, and libraries.
At least some of the elements of the program need to include the industry as a whole, regardless of ownership, size or language. For example, developing a workable system for the electronic exchange of information (EDI) will require agreement on a common standard that can be supported by publishers regardless of ownership and bookstores regardless of size. For this reason, the Department of Canadian Heritage should conceive of its work on this program in such a way that it includes as large a representation of the industry as is reasonably possible.
In light of the above discussion and Recommendation 6.1, the Committee presents the following suite of complementary recommendations:
The Committee recommends that the Department of Canadian Heritage contribute to the creation of an industry-wide forum for Canadian book industry stakeholders to deal with industry issues (e.g. developing a strategy to reduce book returns). This forum would meet on an annual basis and be co-sponsored by the Department.
The Committee recommends that the Department of Heritage offer to co-fund with the industry a study for the French and English language book markets that examines the mechanics of setting up an efficient, timely collection of sales information for the book selling industry, including sales through non-traditional book retailers (e.g., discount stores) and the Internet.
The Committee recommends that the Department of Canadian Heritage assist in the development of an industry standard for Electronic Data Interchange within Canada's book industry.
The Committee recommends that the Department of Canadian Heritage co-fund a study with key industry players aimed at developing workable strategies to reduce and eventually eliminate book returns. The outcome of this work should be an agreed upon initiative to reduce returns by a measurable amount for a set number of years.
The Committee recommends that
the Department of Canadian Heritage introduce a technological assistance start-up program
to assist smaller independent,
Canadian-owned booksellers and small publishers with electronic commerce initiatives.
(This would be a modest level of support; for example, a program that would match the
first $10,000 of money used to develop a web site.)
The Committee recommends that the Department of Heritage fund a program to digitize selected Canadian-authored titles (backlist and out of print). This support should be available to all Canadian publishers, regardless of ownership.
The Committee recommends that the Department of Heritage work with key book industry stakeholders to ensure that digitized Canadian-authored titles are available for printing on demand and e-books in such a way that copyright is protected.
The Committee recommends that the Department of Canadian Heritage report annually on the health of the Canadian book industry. This should include reports on performance measures and targets for specific initiatives (e.g., royalty payments, numbers of titles, sales, returns, etc.).
D. THE CHAPTERS / PEGASUS QUESTION
The Canadian Booksellers Association recommended an amendment to the Competition Act setting out a review of any structural features in an industry that would diminish the opportunities for small and medium-sized firms to operate. The CBA also recommended that the government force Chapters to divest itself of Pegasus in order that the latter is able to function -- and be perceived to be able to function -- as a wholesaler to all retailers in the country. When asked about this, a senior official from the Department of Heritage responded:
I would say that the argument that there's a need to break-up or tear down or do something about Chapters or Pegasus has not been made. And my own view is that if there is
anti-competitive or anti-consumer behaviour, the existing Competition Act can deal with it.176
The Committee notes, however, that it has neither the tools nor the authority to determine if these companies are in contravention of the Competition Act. Indeed, as one Committee member indicated in response to this matter:
It is not for the committee to say or declare whether anyone in the book industry is guilty of unfair competition ... because we have neither the authority to do so nor the authority to conduct an investigation.177
Witnesses agreed that Canada needs an efficient distribution system. The concern with Pegasus is not that it is inefficient, but that Chapters owns it. Although the Committee believes that the fears expressed have been responded to by the president of Pegasus and the CEO of Chapters, it is convinced that it would help the Canadian industry as a whole if the ownership of Pegasus was broader than it is at present.
Chapters had several responses to its majority ownership of Pegasus. In his appearance before the Committee, the President and CEO of Chapters was asked whether he would be prepared to do a complete divestiture of Pegasus. He replied: "For the right amount of money, absolutely, but we've invested $54 million in this business. I would have been prepared to be a minority investor if someone else would have put in the money."178
In a letter to the Chair of the Committee, Mr. Stevenson addressed concerns that Pegasus might share competitive information with Chapters or treat non-Chapters customers unfairly:
We would welcome an equity investment in Pegasus from all booksellers or publishers with Board representation. Alternatively perhaps, an Advisory Board composed of publishers,
non-Chapters retailers and Heritage officials could meet quarterly to review the progress and procedures at Pegasus. This Advisory Board could draft guidelines for business conduct with Pegasus which could then be formally reviewed.179
The President of Chapters has said he would welcome the creation of an advisory board. The Committee supports this idea. While this will help, the Committee feels an additional step is required. It would be better for all if the ownership of Pegasus was more representative of the book industry in Canada. The Committee recognises the fact that it is beginning to make an important contribution to the strength of the book industry in Canada. However, it nonetheless believes that broader ownership would be helpful in allaying various fears that have been expressed.
In fact, Pegasus could represent an important source of cost-savings for independent bookstores and help them to compete with Chapters, Indigo and the Internet.180 At present, short of changing Canada's investment rules (see Chapter Three) there are no obvious candidates who could become sizeable shareholders in Pegasus. The total amount of money required is probably on the order of $25 million.
Thus, the Committee takes note of Mr. Stevenson's offer but recognises that it is not its place to impose a solution.
The Committee was struck by two points made by many witnesses. First, the Government of Canada's support to book publishing has helped the industry meet the important cultural goal of having Canadian authors published and celebrated in Canada and, indeed, around the world. These cultural successes have been accomplished during a period of rapid economic and technological change on the domestic and international stage. Everyone who has contributed to this cultural achievement can feel a justifiable sense of pride.
Despite these cultural accomplishments, it is clear that the goal of developing a financially stable publishing industry has been somewhat less successful. Federal support has contributed to a dramatic improvement in Canada's publishing industry since the 1950s. Indeed, the Government of Canada contributed in excess of $100 million to Canada's publishing industry in the 1990s, with tangible cultural gains. However, the many challenges brought about by rapid economic and technological change have hampered the stability and growth of some sectors of the industry.
Thus, despite substantial cultural gains, the continued financial vulnerability of some book industry stakeholders suggests that certain components of the Government of Canada's support to the industry require some attention.
Our review has focused on changes to book distribution and did not directly assess the health and viability of the whole industry in the depth required to make as many substantive recommendations as might be necessary. For this reason we have suggested a series of measures, most of which should be seen as part of a temporary system to support adaptation to the wave of change sweeping the industry.
These measures are aimed at specific and systemic problems present in the industry as a whole and can be implemented quickly without the time required for the fundamental rethinking of all support.
A number of witnesses called for broad-based measures such as elimination of the GST and a tax credit to promote investments in the industry. In the Committee's view these are major and expensive changes that need to be discussed and thought about in more detail. It is also the Committee's view that these changes are too broad to address the fundamental set of issues raised by witnesses.
In the Committee's perspective that immediate work needs to begin on questions related to the efficiency of the distribution system for books and the efficiency of the industry as a whole. Book returns were mentioned by several witnesses as an important issue. Until there is systematic work on the problem of returns, the federal government should not allocate more resources into broad-based programs since the resources will simply allow people to defer work on vexing problems that have not been addressed.
The support measures we are recommending should be seen as temporary and be designed to address specific problems (e.g., managing the supply chain).
Funds for the initiatives proposed in this report could come from some combination of:
1. Initiatives mentioned in the September 1999 Speech from the Throne to open the Second Session of the Thirty-Sixth Parliament of Canada;181
2. funds allocated in the federal government's 2000 budget to connect Canadians and help cultural organizations with e-commerce; 182 and,
3. existing Book Publishing Industry Development Program resources, provided current programs are not jeopardised.
The total costs of the measures we are suggesting would be approximately $25 million over five years. The Committee feels that this relatively modest expenditure would go a long way to addressing key issues raised by witnesses.
In closing, the Committee would like to remind the reader that despite the turmoil of recent times, this period of remarkable change has produced many benefits. As Mr. Jack Rabinovitch, founder of the Giller Prize in 1994 said in a letter to the Committee's chair:
This award, according to the respective publishers involved, helped sell in excess of one million copies, in Canada, of the short listed books ... in the first five years of its existence; way beyond anyone's wildest expectations. This record-breaking performance would not have been possible without the major change that took place in book marketing during 1995-99. A change that has benefited, in my opinion, the sale of all books but especially Canadian books.183
149 M. J. Rose, "E-Books: The Next Chapter," 9 February 2000.
150 In fact, as long as a book is formatted for computer printing, there is no reason for it to go out of print in the traditional sense.
151 Two companies, IBM and Xerox, have systems that can print books on demand. This includes the ability to print on acid-free paper and have a hard copy available in three days. The binding for the hardcover copy is done at a traditional bindery.
152 "Capitalist Econstruction." Wired March 2000: 210.
153 Ibid. 215.
154 Disposable income is discussed in Appendix G. The most important point to note is that disposable income for most Canadians has remained virtually unchanged since 1990.
155 George L. Parker, The Beginnings of the Book Trade in Canada, Toronto, University of Toronto Press, 1985: 196).
156 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 13 April 2000.
157 A recent random sample of Americans found that 11% use the Internet for online shopping (Wired, vol.8 #5, p. 142).
158 "The Race Is On: Who Will Win Canada's Internet Shoppers? -- A Retail Council of Canada/IBM Canada Study on the state of electronic retailing," Retail Council of Canada, June 1999: 12.
159 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., Interview with researchers, 7 February 2000.
160 Marina Stauss, "Soaring sales fail to stem Chapters' red ink", Globe and Mail, 25 May 2000, B3.
161 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 7 February 2000.
162 "Internet kills off oldest bookshop," CBC Radio Arts, 7 April 2000, infoculture.cbc.ca.
163 It is interesting to note that Indigo, with its 14 superstores, and estimated sales of approximately $70 million (Can.) has sales almost equal to those of SmithBooks, which had annual sales of approximately $100 million (Can.) at the time of the merger.
164 "The Emperor's New Clothes," Brief submitted by The Literary Press Group of Canada, 2 March 2000, p. 34.
165 Monee Fields-White, "E-commerce sales keep escalating," Financial Post, 1 June 2000, C12.
166 Ultimately, they even have a negative impact on the environment, by wasting good trees, the energy to make the books, transport them and the landfill they wind up in.
167 Amazon your industry: Extracting value from the value chain. T. Laseter, P Houston, J. Wright and J. Park, Strategy and Business. First Quarter 2000, pp. 94-105.
168 Tamsen Tillson, Many Unhappy Returns," Globe and Mail, 15 May 2000, p. R1, R3.
169 Submission of the Association of Canadian Publishers to the Committee, 9 May 2000.
170 "Fast Forward: Accelerating Canada's Leadership in the Internet Economy," Report of the Canadian E-Business Opportunities Roundtable, January 2000, prepared by the Boston Consulting Group (Canada), 11.
171 Ibid, 6.
172 Ibid, 13.
173 Ibid, 13, 16.
174 Letter to the Committee, Canadian Publishers' Council, 26 May 2000.
175 See [www.doi.org] for more information on DOI and DRM.
176 Mr. Michael Wernick, Assistant Deputy Minister, Cultural Development, Department of Heritage, 9 May 2000.
177 Standing Committee on Canadian Heritage, 9 May 2000.
178 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 13 April 2000.
179 Letter sent to the Standing Committee, Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 25 April 2000.
180 See Appendix J for an example of how using a wholesaler can be of benefit to a bookstore.
181 The September 1999 Speech specifically mentioned that "For Canada to generate jobs, growth and wealth, it must have a leading, knowledge-based economy that creates new ideas and puts them to work for Canadians. To do this, it is essential to connect Canadians to each other, to schools and libraries, to governments, and to the marketplace -- so they can build on each other's ideas and share information. Achieving this objective will require new types of infrastructure." Furthermore, "improving Canada's information infrastructure will support the exchange of ideas and the conduct of business over computer networks, connect Canadians to the information highway, and accelerate the adoption of electronic commerce." See www.pco-bcp.gc.ca/sft-ddt/doc/fulltext_e.htm for further details.
182 See www.fin.gc.ca/budget00/features/mag-e/brief1-e.htm for information on the federal government's Budget 2000.
183 Letter to Clifford Lincoln, Chair, Standing Committee on Canadian Heritage, 12 April 2000.