Andrew Rhomberg: Who's your Most Favoured?

Andrew Rhomberg: Who's your Most Favoured?

The phrase "Most Favoured Nation" is almost dashing. It enters a conversation with a frisson of international trade-mission largesse. But as attorney Vivienne Robinson wrote for us at The Bookseller recently, the European Commission wants to know if MFN clauses are now present in all or a majority of Amazon's contracts with publishers. If they are, do they breach "rules that ban anti-competitive agreements (Article 101) and abuses of dominance (Article 102)"? As Robinson puts it, "Under a Most Favoured Nation clause, a publisher must tell the distributor if it gives a better price and/or distribution deal to any other party, and it must then offer the same, or sometimes better, terms to that distributor...The problem is that MFN clauses reduce competition between distributors because several (or all) of them will potentially receive exactly the same products, at the same prices, at the same time. This limits their ability and incentive to put forward a more competitive offer to consumers." It may be a year or more before we know the outcome of the EC's investigation into Amazon's ebooks distribution. Which gives us ample time to hear from Jellybooks' Andrew Rhomberg on the matter. Why stop here? he asks us. "The MFN is not the only inhibitor to innovation and diversity in ebook retail." — Porter Anderson

An obscure legal term has made headlines recently, the "Most Favoured Nation" or MFN clause.

Many publishers say they haven’t signed such a clause. But in some contracts it may not go by that name at all, yet there may be language to the same effect. Several years ago, when I was discussing new business models on behalf of Jellybooks with publishers (long since abandoned in favour of things like reader analytics), it was all too obvious that there was something in publishers' contracts with Amazon that had the net effect of being an MFN, even when publishers told me they had not signed a Most Favoured Nation clause per se.

It's one of those legal clauses that looks totally innocuous. After all, it doesn’t "cost" the publisher anything and it might even look "fair", but its effect on innovation and diversity in the book retail landscape has been chilling. It certainly has a chilling effect on new business models and new entrants to the market. It made it essentially impossible for us to make headway with the majority of publishers, and we were not alone.

New business models can be strongly inhibited by it. For example, the agreements that some ebook subscriptions sign with publishers may look like normal retail agreements: the service provider effectively functions as if he is selling books when he is loaning them and as a result is taking all the economic risk. In the long run, that may not work and it certainly puts newcomers at a disadvantage to Amazon’s Kindle Unlimited all-you-can read subscription platform.

Tesco’s innovative ebook subsidiary Blinkbox Books, now sadly defunct, had a lot of clever ideas for innovating in ebook retail, from intelligent bundling (want a free ebook with that box of wine?) to context-based promotions. However, a lot of that may have been difficult to implement because of the contractual restrictions that an MFN clause can impose. It turns already conservative publishers into ultra-orthodox publishers.

What some publishers fail to appreciate is that in retail, a newcomer needs a clear differentiation in order to gain traction, otherwise buyer lethargy massively favours the incumbent. A better recommendation algorithm will not do the trick, contrary to what Anobii and Bookish posited.

The MFN is not the only inhibitor to innovation and diversity in ebook retail. Let's look at some others and what the European Union could do to address these issues.

(1) Large publishers only want to do deals with a handful of accounts directly — at least this was very common between 2008 and 2011 — and once you have to go through a wholesaler, terms get very conservative. (And you are even more at a disadvantage to Amazon). The trend is still noticeable in the "Do you have a million users yet?" question. Hence the big publishers' obsession with Facebook, Twitter, Snapchat, Pinterest, and so on.

The problem could be solved with a model contract that defines all the usual clauses and only leaves the key commercial terms to be defined. This might sound anti-competitive, but isn’t. After all, this is how you buy a house or rent a home in many common-law jurisdictions including America. There is a model contract and only the key commercial terms, like purchase price, interest rates, deposit, payment terms, and the like are negotiated. These usually fit on a single page. The advantaged is that a lot of inefficiency and cost is removed from the system by using model contracts. It would also make it far more efficient for publishers to deal directly with a wider range of partners.

(2) Another problem is lack of scale. How about a model contract that would work across all the jurisdictions of the European Union, allowing innovators to quickly scale across the Continent? Today, the most logical choice for British, German, or French start-ups is to look at the US next, not another European country. A more harmonized contractual system would make a huge difference, and the EU is in unique position to facilitate this.

(3) Another impediment the EU could fix, while it's at it, is the maddening VAT system. Why is VAT on ebooks higher than on printed books? Well I know the historical reasons, but they make little sense in an age in which the EU laments the dominance of American platforms.  Also the introduction of the new VAT rules favours large platforms, not innovators. This is something the EU should urgently address.

(4) The EU has also made noises about the detrimental effect that DRM is having. Sadly there is no easy fix here. Mandating some common DRM standard, top-down, is not going to create a new reading ecosystem deus-ex-machina. The solution can only be the adoption of a non-encryption-based DRM system, often called "social DRM," or no-DRM platform (see moves by Bonnier recently in Germany). But it might include legislation to more easily prosecute and fine (efficiently and based on common sense) those caught infringing — i.e. uploading to file-sharing sites and enabling mass copyright infringement. Casual sharing with one or two close friends (a husband with his or her spouse) is something we need to learn to live with, I’d say.

I don’t see a European equivalent to Amazon emerging. If the history of technology teaches us anything, it's that a dominant platform is not replaced by a functional replica, but by something new. Google beat Microsoft, but not with a better operating system. Facebook’s rise was not based on a better search engine. Twitter didn’t build a better social graph. Apple didn’t build a smaller GSM phone. By the same token, innovation in book retail will come from new directions.

  • One such direction is personalisation. Asi Sharabi's fantastic Lost My Name recently raised a lot of cash from Google Ventures for their personalised children’s books. Sharabi leverages the power of the Web to create a unique book for each reader. That means his product is not commoditised, so is not competing with Amazon. Personalisation and customisation are the big trends in retail. Look at the explosion of start-ups in fashion. They thrive without having to fear Amazon because their products are clearly differentiated and this is the key to any disruptor in retail. They need a clear differentiation, because consumer inertia always favours the incumbent in retail.
  • Another trend will be contextual retailing — start-ups and established companies in other retail sectors bundling books into existing offers. Understanding their customers intimately, they will be able to recommend and offer entertainment uniquely suitable to a particular customer or group of customers.
  • Another trend is dynamic bundling, creating virtual book sets of five or more books assembled to the specific taste of one customer and dynamically priced for that customer. Amazon’s platform is not engineered for such ad-hoc bundling or hyper-personalisation, however, existing contracts make the creation of unique SKUs using titles across different publishers extremely difficult. For a small glimpse of how successful this can be, look at hand-crafted box sets or bundles created by small groups of self-published authors. What they do is innovative, but does not scale and isn’t personalised, yet there is enormous opportunity here.

Overall, there are exciting times ahead for publishing, but a more liberal and standardized framework could be crucial in catalysing the next wave of innovations. Lets hope the European Union surprises us with some creative and well-thought-through solutions.

Main image - Pixabay: Unsplash