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Kobo: Ending Agency Pricing Will Kill Us

Canada's 12697518645_c8c100ce70_m[1]Competition Bureau announced a settlement last month with 4 publishers to end agency pricing, but it looks like the process isn't going to go as smooth as one might have expected.

Kobo has filed an objection to the consent decree, and they ask that the settlement be modified so that they are not negatively impacted by the sudden and radical change to the Canadian ebook market.

As part of their filing. Kobo revealed some rather telling details about their business. They blame the end of agency in the US for the loss of their market share, and they predict that the same will happen in Canada.

Kobo's objection was actually filed 2 weeks ago, but I only got a copy (PDF) yesterday (via Quill and Quire). it's an interesting read, and if you take it at face value then the future does not bode well for Kobo.

Here are a couple sections from the PDF that spell out how

44. The losses would impact Kobo's ability to compete in the Canadian market. By analogy, in the US, when Agency Lite was brought into existence, Kobo saw its net revenues steadily decline. Kobo has since stopped investing in marketing in the US, closed its office in Chicago and is focusing on other markets. Its market share and revenues are now negligible there. Although Kobo is a bigger player in the Canadian market, this will not detract from the fact that such significant losses will impact Kobo's ability to invest in technology and to market its offerings. Regardless of which pricing strategy Kobo chooses to adopt, it expects to be less competitive than it is presently and will lose market share to E-book Retailers who are willing to consistently price their E-books at unsustainably low levels that other competitors simply cannot meet.

45. The harm to the E-book market more broadly will also be significant in that the prohibition on Agency will likely lead to the exit of competitors from the Canadian market and significant financial pressure being brought to bear on the ones who remain. Sony and Barnes & Noble's respective experiences in the US are illustrative of the negative effect of a ban on Agency. Sony exited the E-book market in the US entirely (and has now had its E-book business acquired by Kobo) , and Barnes & Noble's NOOK E-book division reported heavy losses fo r the 2013 fiscal year. A ban on Agency, even in the short term, will have a lasting and irreversible negative impact on the market for E-books in Canada.

In short, Kobo is saying that when Amazon was allowed to discount ebooks in the US, Kobo was unable to compete effectively, not even by means other than price (marketing, CS, features, community). This is rather curious because other companies, including Zola Books, The Reading Room, Bilbary, Oyster, and Scribd all seem to be able to compete effectively against Amazon in the US ebook market. Also, (Barnes & Noble saw most of its growth in the pre-agency era, claiming a 20% market share by the end of April 2010. This only grew another 6% to 8% in the following years. )

Perhaps Kobo should buy out one of their smaller competitors and put that smaller competitor in charge of the Kobo ebookstore?

On a related note, if Kobo has only a negligible market share in the US then I have to wonder whether their partners at the ABA, and its IndieBound program, are beginning to regret betting on the losing horse. Indie booksellers who belong to the ABA can take part in an affiliate program and earn a commission on Kobo ebooks and hardware, but if Kobo only has a negligible share of the US ebook market then the booksellers are not generating a lot of revenue.

image by Sean MacEntee


34 Comments on Kobo: Ending Agency Pricing Will Kill Us

  1. Interesting.

    Didn’t (doesn’t) Kobo offer some serious incentives for buying books on their site? I know I have seen 40-50% off coupons quite regularly and even a 90% off coupon/sale recently. It seems like if they can’t get people to use there service when they offer incentives like this (and apparently much more frequently than Amazon), there is something else going on here rather than just agency pricing.

  2. This is kind of silly. I find it hard to believe that Kobo lost significant market share in the USA with the death of agency pricing, because I don’t think they have ever had a significant market share in the USA.

    They don’t really advertise here, and no one knows who they are.

  3. Actually, whenever I am in the car during morning drive time I usually hear Kobo mentioned on NPR.

  4. True, they do offer coupons often, but they are only good on a subset of their books, and that subset rarely includes bestsellers, older books by bestselling authors, or books (it seems like) by major publishers.

  5. Wonder if having a 90% off, multi-use coupon available over the weekend would have anything to do with Kobo losing money?

  6. They also sponsor Publisher’s Lunch, the email, which I assume has a mostly-U.S. audience.

  7. Hmm…well, perhaps I’m wrong then.

  8. It makes perfect sense to me. As I’ve mentioned before on this site, only Amazon and Apple frequently match prices. Then its either Nook or Kobo, both of which are a couple of dollars more in price. It suggests to me that they can’t afford to match the prices in Amazon and Apple’s war chest.

  9. Amazon and Google have MFN in their contracts so they usually will have the lowest prices. And it’s true Amazon, Apple and Google have other more robust revenue streams while B&N and Kobo do not.

  10. It’s funny that Kobo made the decision to enter the market prior to agency pricing but now they can’t survive without it. Any business would like to have a guaranteed profit margin and not have to worry about actually competing, that’s why there’s such a thing as the Canadian Competition Bureau.

  11. No one can enforce MFN clauses in their contracts anymore. The practice was barred as part of the settlements and rulings as anti-competitive. This all rendered moot as the price is now set by the seller, not the publisher. That was what the whole fight was about.

  12. Dang, I missed that one. Kobo is where I buy most of my books, and use coupon codes whenever I can.

  13. Only Apple’s MFN was ruled illegal. Amazon was not part of the anti-trust case. Judge Cote did not declare all MFN clauses illegal. Each instance has to be decided individually.

    Every self-published author’s contract states Amazon must have MFN. There are thousands of publishers outside the big 5.

  14. Can’t the big pockets of Kobo’s new Japanese owner come to the rescue? I thought that was the whole point of the buyout.

  15. I thought the publishers also had to give up MFN with all the ebookstores?

  16. Since the Sony Reader store is closing Kobo now holds the main ePub market in Canada. That means anyone who has a large ePub based book library will probably choose Kobo as their main store because turning Kindle books into ePub is annoying, and other smaller niche stores don’t carry all the best sellers.

    Kobo would also sell more books if their coupons worked on best sellers.

    I wasn’t aware Kobo ever had a U.S. market. I had to tell my U.S. authors that they should make sure their books were available in the Kobo store, so Canadians could buy their books in ePub, because some authors were only releasing in Kindle and Nook.

  17. Rakuten’s US site does nothing to promote Kobo. Neither hardware or content gets any mention.

  18. Bart Anderson // 7 March, 2014 at 11:16 pm //

    For the books I’ve looked at (admittedly a small sample), the prices at Kobo and Kindle are comparable. Recently Kobo has been cheaper on some titles.

    I’ve wondered why Kobo hasn’t been more aggressive in the US. In one way, it may have been a good strategy to put their resources elsewhere since Kindle is so strong here.

    I think we may be seeing more hard-hitting tactics from Kobo, now that executives from Rakuten have been appointed to leadership positions.

    It would be good for all of us if Kobo can put up a fight against Amazon. We may all love Amazon’s low prices now, but as they assume a monopoly position, the goodies will come to an end.

    Amazon is bankrolling their aggressive price-cutting with an inflated stock value. At some point, investors are going to be wanting a return on their investment.

  19. morning drive time? you have a day job? no way!

  20. We’re already seeing signs of growing restlessness among investors, and growing signs that Amazon is going to twist the knife to actually produce profits for a change.

    Both consumers and suppliers are being squeeze. The drop in audio royalties is just the beginning. The rise in Prime prices and cut backs in free delivery are just the beginning.

    Amazon is a bubble. Not one that’s likely to burst, but it’s going to deflate fast.

  21. Their problems couldn’t have anything to do with sub-par hardware, atrocious Web site design, or (now that the Sony store is closing up shop) the worst customer disservice in the industry, of course. All their problems are because Amazon.

  22. This is my day job. Sometimes I happen to be out in the morning.

  23. Nice theory.
    But it misses a key point: Amazon is a federated company. They share some common resources and top level management, but as Bezos has publicly stated, each unit is expected to be individually viable. And Bezos has clearly stated this applies to both hardware and content, in the Kindle case.
    Amazon’s margin issues are in the dry goods area, not Kindle.
    (The feds looked at their Books and publicly stated Amazon was not losing money selling ebooks. And as part of the antitrust case, their new contracts now forbid thdm from doing what they never did.)
    When you look at Amazon’s recent adjustments, real and theoretical, they are focused on shipping costs, not on product pricing. Which is to say, they have made no efforts to dramatically increase consumer prices.
    So nobody should expect any kind of blanket consumer price increases of the kind that would lead consumers to alter their perception of Amazon or their shopping habits.
    And, do note, that at a time many general merchandise and specialty retailers are a stress because consumers as a whole are spending less, Amazon is expanding its reach and its market share.
    The real danger from Amazon isn’t to consumers but to B&M competitors; once Amazon’s new distribution system is built out, their dry goods operation may get even more efficient and less dependent on external shipping services.

  24. I’d be careful to read too much into Kobo’s protest.
    It is primarily a political lobbying whinge.
    Canada’s government is constantly trying to balance consumer protection and corporate protectionism and often the latter prevails in matters of “cultural significance”. So Kobo is simply trying to maximize their local player advantage by not so discretely painting themselves as needing protection for eeee-vile unstopable behemoth Amazon.
    In other words, they’re playing the ADS card and raising the flag to see if the bureaucrats salute.
    The Canadian ebook market is already skewed plenty against Amazon, as evidenced by their reduced market share and lower competitiveness of their Canadian-based Kindle site and that is precisely how Kobo likes it.
    “Oh, mister bureaucrat, please keep on crippling Amazon’s competitiveness so we can keep on soaking the local consumers.”

    It’s lobbying. Lobbyists’ job is to lie credibly on behalf of their causes.

  25. Oh, I know it’s whinging. But by taking their statement at face value I was able to politely call BS on it.

  26. Which it clearly is.
    Their lack of stature in the US market isn’t due to lack of pricing competitiveness but rather lack of presence, as you’ve repeatedly pointed out. They got off on a bad foot by partnering with borders and they haven’t helped their cause with their spotty supply record. Relying on a few hundred indie bookstores to push their platform is not an effective distribution system for a country like the US.
    They really haven’t done much to reach out beyond the hobbyist/epub true believer market to the mainstream market. They don’t seem to be doing much of preload deals with tablet vendors and relying on tablet users to somehow run into their apps and magically decide to commit to their ecosystem isn’t terribly proactive.

  27. Bart Anderson // 8 March, 2014 at 2:53 pm //

    To me, the elephant in the room is Amazon’s ability to get indirect subsidies. As far as I can see, Kobo can’t compare to Amazon here.

    What has always struck me about Amazon’s rise is that for most of its lifetime, it was subsidized by the online exemption from sales tax. In California, that amounts to a 6.5 to 10 percent advantage over brick-and-mortar retailers.

    And then there is Amazon’s aggressive and maybe illegal tax avoidance.

    Finally, there is the funny business about a no-bid contract from the US government that was rescinded.

    As in all that Amazon does, its relations with government are efficient and ruthless. For example, the brilliant move by Jeff Bezos to buy the extremely influential Washington Post at a bargain price. Very far-sighted for Bezos, but very dangerous for the rest of us.

    As far as being “evil”, I dunno, but there is the chilling air of sociopathy around Amazon. They have very high employee turnover. A high tech journalist told me that he’s never met anyone who *likes* working there. Bradstone, author of “The Everything Store,” said, “Amazon views publishers as ‘sickly’ gazelles and itself as a cheetah.”

    When a company sees itself as a predator, it is wise for the rest of us to remember that we are potential lunch meat – whether we are customers, employees, or business partners.

  28. Self-publishers still have an MFN in their ToS – in the US anyway. It was ruled illegal in the UK (possibly the rest of the EU, not totally sure).

  29. I call bullshit. Kobo never had significant market share in the US, and they have flagged their intention to mostly focus on international markets for ages. And anyway, there are a bunch of reasons why Kobo is struggling and will continue to. Mostly, it’s about the store (Amazon’s competitors always seem to focus on the device and never seem to realise the importance of the store).

    The site redesign was a disaster – it’s like walking into a Barnes & Noble where all the shelves have been ripped out and only consists of front tables. It just seems to be all co-op over there. Search is still abysmal – hardly surprising when we can’t even enter any keywords when uploading books (which also leads to things like the erotica panic, but I digress). The category system is awful. Ranking makes no sense. Random books can appear in the charts for no particular reason (I had two books appear in the US Top 50 with no sales!). The whole system is pretty broken.

    Which is such a pity, because Kobo Writing Life – the self-publishing platform – is great. Nice reports, nice upload process, it’s missing keywords (big fail), but it’s clean, easy to use, and has a bunch of handy tools. The KWL people are great too, they really want to push their authors and help them sell more books. The problem is at boardroom level – or whoever makes the decision to have publisher co-op instead of a functioning recommendation engine. It’s the same mistake that B&N made, and that didn’t work out too well.

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