Written evidence from the Booksellers Association of the UK & Ireland Ltd (TDE 107)

1              INTRODUCTION

1.1              The Booksellers Association [“BA”] welcomes the opportunity to give its views on The Digital Economy. 

BA membership

1.2              The Booksellers Association[1] is a trade association, based in London WC2, currently (as at January 2016) with 818 bookselling businesses in membership, accounting in total for 4,583 outlets.

1.3              BA members cover a diverse range of different bookselling businesses - specialist bookselling chains (e.g. Waterstones and Blackwells); independents; large High Street chains with mixed businesses (e.g. W H Smith); supermarkets (e.g. Tesco, Asda, Sainsbury and Morrisons); library and school suppliers; specialist internet booksellers; and the two national wholesalers (Bertrams and Gardners). 

1.4              BA members sell to all markets (consumer – fiction/ non-fiction/ reference/ children’s; academic – academic/ professional/ school/ English Language Teaching) from retail shops and over the internet in a variety of different formats (hardback, paperback, audiobook and ebook). 

2              DEFINITION OF THE DIGITAL ECONOMY 

2.1              It is taken that the Digital Economy is based on digital technologies, including although not restricted to conducting business through markets based on the internet and the World Wide Web.

2.2              In the UK book trade, Amazon dominates our market. 

3              THE POWER OF AMAZON

3.1              Amazon have developed unparalleled dominance in the UK book trade over a short period of time.  The BA is extremely concerned about the situation and  raised in June 2015 a Formal Complaint with DG Competition in Brussels, alleging that Amazon have a dominant position in the book market place, and are seemingly abusing that dominant position.  We have asked DG Competition to investigate the situation to ascertain if any of our allegations can be substantiated. 

3.2              In our submission we have made very many complaints, including the following allegations:

3.3              In the UK, Amazon’s e-book sales are estimated to account for 80% – 90% of all e-book sales.  Furthermore, their on-line physical book sales are believed to be around 70% – 80%.  Kindle dominate the e-book readers on sale in the UK.  92% of all e-readers sold at Christmas 2013 were estimated to be a Kindle.  More than 1 billion units worldwide were ordered through Marketplace. 

3.4              Amazon now covers so many key areas in the book trade.  Amazon is a bookseller, publisher, hardware retailer, major seller of mobile APPS, and a major growing content provider. 

3.5              Amazon’s exponential growth in recent years is phenomenal.  Amazon now sells more online than its top 12 competitors combined[2] – and that includes US giant Walmart.

3.6              Bookshops have closed because of Amazon, and because of this consumers will experience a reduction in choice of supply and less variety.

3.7              Amazon is a seriously aggressive company.  Amazon’s CEO Jeff Bezos has been quoted as saying “that Amazon should approach ... small publishers the way a cheetah would pursue a sickly gazelle.”[3]

3.8              Amazon directly and tacitly encourages ‘Showrooming’, whereby consumers view the product in physical retailers and then go on to order the item online.  Amazon has introduced a bar scanning APP to its Amazon APP.  “Firefly” allows users to use the in-built camera to recognise barcodes, texts, images and sounds and then link to the Amazon store for customers to buy it directly, using a single click. 

3.9              93% of booksellers responding to a BA survey believed Amazon had sold print books below cost during last two years.  (In broad terms, Predatory Pricing takes place when a seller sells a product and service below cost in order to take out the competition.) 

3.10              Moreover, independent researchers believe that Amazon may well have been selling the Kindle below cost.  IHS iSuppli[4] estimates a Kindle selling at $79.00 cost Amazon $84.25 to manufacture.  There is no proper competition for Kindle.

3.11              Furthermore, it is the BA’s view that Amazon Prime[5] unbalances the competitive playing field by directing customers to the Amazon ecosystem.  Prime[6] was seemingly created to ensure consumers elect not to shop anywhere else and the charge to consumers is believed to have been below cost.  What is extremely irritating to booksellers is that Amazon’s perceived near loss-leading – or actual loss leading – is designed to direct consumers to the more profitable products that Amazon sell.  It is the BA’s contention that after Amazon have destroyed the competition, they will increase prices.

3.12              If they wish to reach a large number of consumers, many booksellers find that they have little option other than to use Amazon’s Marketplace. Over 40% of booksellers responding to the BA’s survey said they had sold books on Amazon Marketplace. 

3.13              But by having to use Marketplace, booksellers are helping to make Amazon even stronger.  Marketplace gives Amazon access to data on, say, pricing and consumer behaviour which is not available to Marketplace sellers or competitors, plus Amazon control the catalogue and merchandising (often charged out to publishers), which subsequently controls access to books. This dominance within channel pivots upon control of access to customers, something which is unique. In the BA’s survey canvassing views from members:

• 11.5% of booksellers said they had been prevented by Amazon from offering to consumers on Marketplace a deal that is lower than theirs
• 10.8% of booksellers said Amazon had tried to impose on them what price the bookseller should charge consumers when the book was sold on Marketplace

3.14              Amazon is regarded by the Public Accounts Select Committee[7] as not paying their fair share of tax to HM Treasury.  Amazon has had a fiscal advantage when competing against booksellers.  Until 1st January 2015 (when the VAT Rules changed) Amazon has been diverting UK sales through Luxembourg – benefiting from lower Corporation Tax and VAT.  By this means, Amazon were, for many years, selling e-books to UK consumers via Luxembourg at 3.0% VAT, whereas our members in the UK had to impose 20% VAT.  Small wonder that Amazon were able to build up such dominance in the e-book market. 

3.15              Amazon’s UK sales in 2013 were £4.3 billion; their payment of Corporation Tax was £4.2 million (= 0.1% of profit). 

3.16              By being a global internet retailer, Amazon has an opportunity to indulge in transfer pricing - overcharging entities in higher tax countries and completing the transaction in a lower tax country in order to produce the lowest tax charge.   

3.17              The BIS Select Committee may be interested at looking at the relationship Amazon has with suppliers.    

3.18              The well-publicized dispute that Amazon had with the American publisher, Hachette, publicized steps that Amazon took if they did not get their way in negotiations with publishers.  These measures included Delisting Books; Delaying Deliveries; and Preventing Books from Being Pre-ordered.

3.19              The BA also surveyed publishers, and the feedback was alarming: 

• 42% said that in the last two years Amazon had attempted to prevent the publisher from offering a better deal to anyone other than Amazon
• 25.5% said that they had been asked by Amazon to restrict discounting in other channels below the Amazon price
• 6.8% had said they had been asked to give exclusive distribution rights to Amazon
• 4.6% said they had been asked by Amazon to ring fence stock for Amazon, without receiving a guaranteed order
• 39% were told by Amazon that the internet retailer would use its own Print-on-Demand facilities to supply its own copies of a title if the publisher had reported the book as out of stock
• 20.5% said they had contracts with Amazon which specified no expiry date, enabling the internet retailer to change the terms whenever it liked
• 12.8% of publishers said that Amazon had discouraged customers from buying new and forthcoming titles by making it impossible for consumers to order or pre-order
• 39% of publishers said that Amazon had used, or threatened to use, tactics that the publisher disapproved of.

3.20              And if publishers have to give in to Amazon’s demands, publishers have less to give in trade terms and support to our members.  Because of this, bookshops have been closing in the UK & Ireland.  The following table shows the situation since 2005[8].

Year                            No of independent bookshops (outlets) in BA membership

2005                                                                      1535

2006                                                                      1446

2007                                                                      1424

2008                                                                      1350

2009                                                                      1252

2010                                                                      1159

2011                                                                      1094

2012                                                                      1028

2013                                                                          987

2014                                                                        951

2015                                                                        905

3.21              These closures, we would contend, are not benefiting the consumer. 88%[9] of consumers are concerned there are fewer bookshops in the high street than five years ago.

3.22              68% of shoppers say they prefer to discover new books in bookshops – but they are facing fewer bookshops.  Market research has indicated that 45% of consumers go to bookshops because they have no idea what specific book to buy.  They are being disadvantaged by there being fewer bookshops.  Consumers would discover fewer new writers and the less well-known books. 

3.23              Communities will suffer.  Book buyers are facing access to fewer bookshops that: 

• Organise talks to schools about books
• Supply books to schools and libraries
• Hold author events
• Run book clubs and reading groups
• Support literacy initiatives like World Book Day and Quick Reads, and encouraging reading in both adults and children to support literacy
• Support local events and the community
• Support World Book Day (WBD), the biggest book promotion in the world, which encourages  young children to read

3.24              A bookshop closure is a cultural loss to the community.

3.25              DG Competition should look in particular at whether there is unhealthy domination in the EU book market and, if so, whether there has been an abuse of that dominant position, which has had a detrimental effect on competition. 

4              INTEROPERABILITY

4.1              The BA believes that it should be possible for consumers to read any e-book on any device and for the reader to be able to easily access content from any supplier.  But this hasn’t been possible with the Kindle.  Other bookshops have been locked out.

4.2              The Kindle e-book ecosystem is a closed one.  Kindle content is not transferable to non-Kindle apps.  E-books bought via Kindle can only be bought from the Amazon store.  Non Kindle/Amazon e-books cannot be read on a Kindle.  Kindle e-books can be read on a variety of devices via the Kindle reading app, but the e-books still have to be bought from Amazon. 

4.3              The reason that Amazon’s e-books are not readable on every digital device is because Amazon chooses not to support the EPUB standard that was developed by the open e-book forum, International Digital Publishing Forum (IDPF).  EPUB 3 in particular was approved as an official IDPF standard in October 2011, and in March 2013, the International Publishing Association (IPA) recognised EPUB 3 as the preferred standard format and recommended that publishers should use this standard for e-books.

4.4              Amazon uses an e-book format called KF8.  These files are generated by a proprietary converter which accepts EPUB files as input.  However, Amazon introduced proprietary extensions and modifications making the two standards EPUB and KF8 incompatible.  The Amazon world accepts EPUB files as input but does not allow users to export or transfer e-books to other ecosystems.  That is why the Kindle readers, as well as the Kindle reading software apps, only display e-books bought in the Amazon e-book store, and Amazon’s Kindle store delivers content only to Amazon reading devices and software.  This makes Amazon’s ecosystem closed as it allows no free exchange of books. 

4.5              Besides incompatible formats, Amazon uses proprietary DRM measures to prohibit the free exchange of e-books between different ecosystems and to protect their own ecosystem.  For interoperability, the different ecosystems must allow users to import and export e-books while still enforcing the DRM restrictions. 

4.6              From a technical perspective this is possible; however, Amazon need only accept books that are sold outside its ecosystem and enforce usage restrictions that have been defined by a different ecosystem. 

4.7              From the business perspective of Amazon, this is not attractive.  Instead, Amazon uses incompatible DRM schemes to prohibit the free exchange of e-books and to bind users to its own ecosystem.

4.8              Non-interoperable e-book formats cause various problems for customers as the making available and reading of e-books becomes ecosystem-specific.  For example, e-books that are provided by Amazon can only be read and used on Amazon devices (and reading apps); reading an e-book from Apple’s iBookstore on Amazon’s Kindle reader is impossible due to the non-interoperability of the formats.

4.9              The transfer of e-books from one ecosystem into another is not possible (or, at least, requires illegal measures) for customers.  Therefore, buying books in different ecosystems and viewing them with the same reader becomes impossible.  The existence of closed ecosystems in the e-book market also causes problems for local bookstores and other online retailers which deliver e-books using interoperable formats. 

4.10              Customers with Amazon’s Kindle readers can only read e-books bought from the Amazon Kindle Store.  Therefore, not only is there no free choice of online bookseller, but it is impossible to buy e-books at local bookstores or other online retailers as the Kindle reader can only process e-books in Amazon’s KF8 format, which cannot be provided by the local bookseller or other online retailers.

4.11              In addition, the typical argument that Amazon runs to defend its closed ecosystem—the argument that these technological restrictions are required to protect intellectual property and secure the proper running of the e-reader system—has been put into doubt. 

4.12              The need for operating a closed ecosystem was questioned in a study[10] “On the Interoperability of eBook formats” commissioned by the European and International Booksellers Federation, where it was concluded that there “are no technical or functional reasons for Amazon and Apple to fence off their e-book worlds using proprietary e-book formats.” 

4.13              This is the result of research conducted by Professor Dr. Christoph Bläsi and Professor Dr. Franz Rothlauf of Johannes Gutenberg University Mainz (JGU) and handed over to Neelie Kroes, then EU Commissioner for the Digital Agenda, in Brussels.

4.14              It found that “the EPUB 3 standard alone would not guarantee the complete interoperability of e-books for consumers. The digital rights management measures of the different publishing worlds would have to be synchronized. The study holds that this would be feasible, given the corresponding will of the parties concerned.”

4.15              The BA Survey found that 96% of UK bookseller respondents believed that e-books should be readable on any device.  Further, 97% of bookseller respondents believed that consumers should be able to buy their e-books from any supplier regardless of the device they wish to read on.  As explained above, there is no technical or functional reason why this should not be so.

4.16              Proprietary systems should be ended.  Interoperability should be introduced so that consumers can read any e-book on any device in order that e-content can be obtained from any supplier.

5              CONCLUSION

5.1              The Booksellers Association would be pleased to give additional information to the Select Committee, if required, either orally, or by means of a further Written Submission.

5.2              We very much look forward to reading the Committee’s Final Report.

Giles Clifton

Head of Corporate Affairs

7th March 2016

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