Proceedings of the Standing Senate Committee on
National Finance
Issue 15 - Evidence - April 4, 2012
OTTAWA, Wednesday, April 4, 2012
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to continue its study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Good evening everyone and welcome to this meeting of the Standing Senate Committee on National Finance.
[English]
This evening, we are continuing our study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy.
Colleagues, tonight we return to the topic of books, and we are pleased to welcome representatives of the publishing industry here in Canada.
Kevin Hanson is President of the Canadian Publishers' Council and is also President of Simon and Schuster Canada. Jackie Hushion is the Executive Director of the Canadian Publishers' Council. James Reeve is Senior Vice President and Managing Director of the Higher Education Division of Nelson Education. Carolyn Wood is the Executive Director of the Association of Canadian Publishers.
Ms. Hushion, I believe you have some introductory remarks, and then I will go to Ms. Wood after you. The floor is yours.
Jackie Hushion, Executive Director, Canadian Publishers' Council: The Canadian Publishers' Council represents the interests of companies that publish books, but also digital and other electronic media, for children and for adults of all ages. Our corporate members' marketplace includes general-interest bookstores, so bricks and mortar retail stores, for fiction and non-fiction, campus bookstores, which sell to students and faculty but also publishers sell to students and faculty, elementary and secondary education school systems and institutions, provincial government and members of the professions such as law, medicine, accounting and libraries.
Some of our members are owned in Canada and some are owned internationally. In the aggregate, they employ more than 4,000 Canadians. This past year, they paid $50 million in advances and earned royalties to Canadian writers for the sales of their indigenous Canadian works.
The book marketplace is robust and dynamic, and that reflects the wishes of consumers who want books produced around the globe. We are a bit of a test market. We are the single most open market in the world, making room for goods priced in three currencies: The pound sterling, U.S. dollars and our own currency.
We appreciate the logic of studying the price differentials because we know only too well what periods of dramatic volatility in exchange rates feel like and the kind of impact they can have on an industry.
The industry and original Canadian publishing have both been dramatically enhanced by what are called exclusive distribution provisions in Canada's Copyright Act. Over the past years since those were introduced in 1999, publishers have also facilitated dramatically lower prices on imported titles against a falling rate of exchange. As you know, books are one of the few goods with pre-printed dual prices. We know that that attracts attention and can be confusing.
We noted, in earlier testimony from booksellers and students associations, references to a 10 per cent tariff, or tax, or duty on imported works. We also noted an assertion that the 10 per cent buffer against a changeable rate of exchange goes directly into publishers' pockets. That is misleading and absolutely incorrect. Before expanding on that, let us do a quick overview of how the business generally operates.
Books are sold to retailers at a discount off the suggested retail price. The publisher only suggests; the publisher does not set prices and is prevented from doing so by Canada's Competition Act. The retailer can then sell the book at whatever price he or she chooses.
It is important to recognize that booksellers in Canada may all return the books they have not sold to the publisher-distributors, like Mr. Hanson and Mr. Reeve, for full credit. Retailers expect that publishers will sell to them at fair prices. The flip side of that is, as per the importation regulations in the Copyright Act, the retailer must then source in Canada those titles which are contractually represented here. If there is no contractual agreement in Canada between an international publisher and a publisher in Canada, everyone is free to bring that company's books in.
The regulations came into force in 1999. I have copies here for all of you, if you would like to have them. I apologize that they are not bilingual; the French market is completely different in this context in Canada. These were produced by the Department of Canadian Heritage jointly with us and they are in English only, but you might find them helpful. If you would like to have them, I will provide them to your clerk.
The Chair: Thank you.
Senator Ringuette: They should be in both official languages.
The Chair: Who did you say published these?
Ms. Hushion: These were produced by us in 1999, with the support of the Department of Canadian Heritage, but they do not really apply in French Canada. There was talk at the time about whether or not we should publish them in both languages. These go to the publisher and the retailer because they govern the activity of exclusive distribution as per the act.
Senator Nolin: People selling books in English Canada would follow that?
Ms. Hushion: They could. I cannot say that they necessarily all would. It depends.
The Chair: We may want to pursue this further as to what you meant by "French Canada" and "English Canada."
Ms. Hushion: That is only when we are talking about publishing.
The Chair: We will pursue that later. Thank you for prompting the questions.
Ms. Hushion: These regulations were negotiated among the Canadian Booksellers Association, with representatives from both bricks and mortar retail stores and campus bookstores; with the Association of Canadian Publishers — and Ms. Wood, on my right, was part of that negotiation; the Canadian Library Association, whose representative was the chair of the negotiations; myself, representing the Canadian Publishers' Council; and representatives from the Department of Canadian Heritage and Industry Canada present at all the meetings where these regulations were negotiated.
The key crucial point here is that the exclusive distribution sections of the act have helped Canadian-based publishers maintain their competitiveness in their own marketplace and have helped the industry prosper. I do not mean that in financial terms necessarily, but they have fostered its growth. This works in the interests of consumers, booksellers and publishers as well, through dynamic pricing, and it provides remarkable choice and better and more efficient services relative to imports. This means an increase in the viability of original Canadian publishing. When you have greater critical mass of titles over which you can spread all of your costs, then you have more to invest in original Canadian publishing.
As more opportunities and avenues of access to content are opened in this digital age, we all have to be more agile or fleet in terms of corporate planning and more creative if we are going to maintain the integrity of a distinct Canadian marketplace while meeting the demands of book consumers.
If an exclusive distributor prices outside these regulations, its exclusivity is forfeit and anyone is free to bring those books that it represents into Canada directly, until such time as the exclusive distributor adjusts prices to come within the regulations again.
I hope that some of this information will be useful as we talk with you today. We will do everything we can to assist in your study, and that is going forward as well. We are available to answer questions and to provide anything you need after today.
The Chair: Thank you, Ms. Wood.
Carolyn Wood, Executive Director, Association of Canadian Publishers: Thank you for the opportunity to be here tonight. This is a matter of great importance to the members of the Association of Canadian Publishers.
As you have already deduced from earlier sessions and from the array of people here tonight, there are many players in the book sector in Canada, and it is a complex industry. I am here representing small- to medium-sized businesses, about 125 independent, Canadian-owned only, English-language publishers. It is a large number of publishers compared with the Canadian Publishers' Council. As I said, our members must be Canadian-owned. While we are many in number, we are smaller businesses entirely.
You will often hear discussions around pricing reflect a sense of big, multinational corporations against consumers, or students, or booksellers. I am here on behalf of small, independent businesses to say that it is our cause as well. The regulations that Ms. Hushion has been taking about are every bit as important to Canadian-owned firms — that is, independent publishers — who, I might add, publish the majority of Canadian-authored books than anywhere in the world because this is where that is happening.
Our members publish in all genres: Children's books, scholarly works, educational text books, literary works, fiction, drama, poetry and the whole spectrum of general interest books, from politics, to cook books, to biography, to Canadian history. Our members publish in print, in e-book format, in audio books and in the full spectrum.
The larger corporations that Ms. Hushion's association represents dominate the Canadian marketplace, both in general interest bookstore business and in the educational market. These are companies we fight to gain a foothold within the marketplace every day, and it is very much an uphill battle for our members. We are not always on the same side in public policy issues; we are very accustomed to looking across the table at each other. We are here, on the same side, around this issue because, as Ms. Hushion has suggested, the stability that these measures have brought to the Canadian industry is a vital support for that industry, and that industry is a vital support for Canadian writing and, thereby, a service to Canadian readers.
I cannot overstate the larger role that these measures have played in protecting that industry that is so important to Canada.
The Chair: Thank you very much. We appreciate your background. Now maybe we can get into some of the questions that might have arisen from the points you have raised.
Ms. Hushion, can we just clarify this matter of French and English? We very closely regard the importance of both official languages here in Canada, particularly in the Senate. You referred to some regulations. What you have brought along, it appears, is a summary you prepared of Canadian regulations, and the Canadian regulations would be in both official languages. Is that correct?
Ms. Hushion: Correct.
The Chair: What we have is your summary that is only in one of the official languages.
Ms. Hushion: Yes, and it was produced in the fall of 1999.
The Chair: Thank you. I think that clarifies that point for us. Anything further on that? There was some confusion as you were giving your presentation. Anything further on that point, colleagues, that you could help clarify?
Senator Ringuette: My question was — and maybe I heard you wrong — that you received money from Heritage Canada to print those regulations. Maybe I misunderstood you.
Ms. Hushion: No, you did not. You are correct. There was funding to produce them so that everyone in the industry and consumers, if they needed them — though I do not know why they would — would be able to have access to this synopsis, not in legalese, of the regulations in the act. That was through what was then referred to as the Book Publishing Industry Development Program, BPIDP, within the Department of Canadian Heritage, in 1999.
Senator Ringuette: I just have a comment, and I guess maybe the committee can send the same comment to Heritage Canada. When funding to print government regulations goes to anyone, it should be on the condition that the information be printed in both official languages.
The Chair: Thank you. I think that was part of our concern when you gave your presentation, but I think we now understand that this is not an official government publication but, rather, a summary.
Ms. Hushion: It is not. Thank you.
The Chair: Presumably there may well have been — we do not know — something financed by Heritage Canada for French importers as well, in the French language.
Ms. Hushion: I honestly do not know. Because, as I said, the marketplace is extremely different, I have no idea what our counterpart organization, Société nationale des éditeurs de livres, in Quebec, may or may not have done in this context.
The Chair: We can pursue that. Thank you. Ms. Wood, before we get started with the senators who have indicated an interest in participating, you emphasized the importance of the rules and the structure that you have set up allowing for the 10 per cent extra over the U.S., which was negotiated. Is any of that being challenged or likely to be impacted by the copyright legislation that is currently before Parliament?
Ms. Wood: The copyright bill in place now makes no reference whatsoever to the regulations in question today. It is silent.
The Chair: You said the copyright bill that is in place now. Do you mean the copyright legislation that is now in place?
Ms. Wood: The regulations are part of the legislation that is now in place. The new bill that is in the works, Bill C-11, does not make any reference to them at all.
The Chair: Thank you. Did you have anything further on that, Ms. Hushion?
Ms. Hushion: I just wanted to clarify that the regulations govern the sections of Canada's current Copyright Act called "exclusive distributor." There is no reference to exclusive distribution in Bill C-11.
The Chair: These regulations are not likely to be impacted?
Ms. Hushion: No.
The Chair: Thank you.
Senator Hervieux-Payette: When I go to the United States, it is almost a leisure activity to visit bookstores. Is the market for Canadian authors as open in the U.S. as the Canadian market is open to U.S. authors? French authors from Quebec have a problem having their books in France, while there is unlimited access to our bookstores for the French authors. In your case, when it comes to the U.S., any time you publish a new book, is the market in the U.S. as open as the Canadian market?
Kevin Hanson, President (President of Simon and Schuster Canada), Canadian Publishers' Council: I think the answer is yes, for the most part. Generally speaking, as was referenced by Ms. Hushion, the Canadian book marketplace is the most open marketplace in the world. Publishers and distributors in Canada — my background is on the English side — bring in almost every English-language book available in the world. In some cases, rights are purchased, and the book is published uniquely here. There are royalties paid to the author uniquely. In other cases, the books are distributed. There is a difference between publishing and distribution, but there is more flow of books into this marketplace.
In the U.S. marketplace, typically, the larger houses publish books. They acquire rights for that territory, and they are less oriented to distributing books the way that the Canadian marketplace is.
Senator Hervieux-Payette: You have some barriers?
Mr. Hanson: There are other ways that those books find their way into the marketplace, but it is different. The Canadian consumer wants the availability of books from all around the world — from Australia, England, and the United States — as well as domestically produced books. There are other markets, like the U.K, in which publishers do sub-distribution, but the organization of the industry is around publishing and the acquiring of rights.
Senator Hervieux-Payette: When it comes to price, do you publish electronic versions, and are they the same price on both sides of the border?
Mr. Hanson: No. If you were to go to the United Kingdom and Australia, books are priced differently for each marketplace. Typically, each publisher chooses a different pricing methodology to their marketing and sales strategies.
Typically, what you see in the U.S., the U.K, and Canada, generally, is that the electronic price is derived from something of the print price. It depends.
Senator Hervieux-Payette: What does deriving mean? Does it mean it is the same or below?
Mr. Hanson: It is different. It moves all the time. If you look at an electronic book, if it is a bestseller, it is low. If it is not a bestseller, it is high. Sometimes it is promoted, and it is lower. There are a lot of degrees of difference.
On the electronic side of books, the publisher typically is the price setter to the consumer and the retailer acts as an agent to the consumer. On the retail side, the publisher sells the books in wholesale terms and there is a physical book sold to them but it is fully returnable. The retailer can return it to the publisher. The terms of trade do differentiate by the two different kinds of products.
Senator Hervieux-Payette: It makes my life complicated.
Mr. Hanson: Ours too in many ways.
Senator Hervieux-Payette: The system is not that simple.
Ms. Hushion: It is wonderful and very safe to say that the names Ondaatje, Atwood and Munro are as revered and as iconic among American readers as they are among Canadian readers and, again, I am speaking only about our sector.
The sale of Canadian finished books into U.S. bookstores and into U.S. libraries is probably much less than the sale of finished goods from the U.S. into Canadian bookstores and Canadian libraries. It is more common for me, as the originating publisher of this Alice Munro title, to sell to an American publisher based in Boston or New York the rights to publish an American edition because copyright is territorially divisible. That is more often the case than that the books are sold as finished goods into the retail marketplace.
Senator Hervieux-Payette: I want to understand your word "published." Does "publishing" mean the printing is done in U.S. also?
Ms. Hushion: To publish means to make available.
Senator Hervieux-Payette: Does that mean a book that I can touch or just a book that is on your computer that you can send so they can print it and change the cover, for instance?
Ms. Hushion: Both.
Senator Hervieux-Payette: Both?
Ms. Hushion: Making it available. It could be either.
Ms. Wood: For our members, there are some occasions where they will sell the rights so that an American publisher can bring out a U.S. edition of a Canadian author, but more often they sell themselves. The Canadian publisher sells into the U.S. market. For some of our members that is up to 50 per cent of their sales going into the U.S., especially for children's books and some general trade books. It is a very important market.
All in all, it is harder to get Americans to pay attention to Canadian books than the other way around. That is because there is a whole promotional behemoth in U.S. TV and print and so on that is bringing the attention about American books to Canadians that does not happen the same way in the reverse.
However, I would point out that there are really only two Canadian cultural industries that have made a really big impact on the international market, speaking, again, as I only ever do for English-language publishers. Those are literature and recorded music.
There is not the same impact in the wide world of Canadian television, certainly not English-Canadian films. It is a bit better for French-Canadian films. In terms of English language, music — and that is only since Canadian content rules were brought in by government policy — and writing are the two that have really brought Canadian cultural voices to the rest of the world.
The infrastructure that supports Canadian publishing, which is very complex, is reflected in exactly this discussion we are having tonight. That is one reason for this reality existing, of Canadian authors now routinely appearing on the short list for international awards and having sales in big numbers in countries outside of Canada.
Senator Hervieux-Payette: In relation to the Life of Pi by Yann Martel, how did he manage, first, to win a U.S. prize? Was one of the publishers from your association? How did he manage to distribute in the rest of the world? What is the mechanism? Maybe all the other members know, but I do not know exactly how this book could be found all around the world.
Ms. Hushion: As Ms. Wood said, it is now common to see Canadian writers' works on the short list for the Orange Prize for Fiction, the Commonwealth Book Prize, and Commonwealth territorial prizes, the Mann Booker Prize, et cetera.
Every October, in Frankfurt, the publishing world convenes to talk about the sale of rights and the sale of books. It is wonderful to see the huge banners across the main street leading into the fairgrounds with information about where Margaret Atwood is speaking and where someone else is speaking. The Canadian brilliance in literary accomplishment is recognized the same as is brilliance in the literary accomplishment in other countries. Publishers would be eager to buy the international rights for a book like Life of Pi.
Senator Marshall: Could you talk about the exclusive distribution provisions of the Copyright Act again? The 10 per cent we talked about earlier, is that always applied? It is not, is it?
Ms. Hushion: The 10 per cent is not in the statutes. The exclusive distributor provisions of the Copyright Act define an exclusive distributor and define how one is identified, et cetera. The 10 per cent is part of the regulations.
Senator Marshall: Yes, and I have them right here.
Ms. Hushion: Those regulations were negotiated within the industry.
Senator Marshall: Right.
Ms. Hushion: However, they are not in the statute.
Senator Marshall: That is right. I am looking at the regulations now, but we are trying to find out the reason for the price discrepancy between the Canadian prices and the American prices. One reason is the exchange rate, another reason would be this 10 per cent, but in reading the regulations it appears that the application of the 10 per cent is not mandatory.
Ms. Hushion: That is right.
Senator Marshall: How much do you know about the 10 per cent? Is it something that is usually applied?
Ms. Hushion: I can answer that, but I think you would be better served to have real publishers who are in the business of importing goods answer that.
Senator Marshall: Yes, whoever can answer, please go ahead.
James Reeve, Senior Vice President and Managing Director, Higher Education Division, Nelson Education Ltd.: I will answer that question.
Nelson Education Ltd. is Canada's largest academic educational English-speaking publisher. We have been in operation in Canada for almost 100 years, educating generations of Canadians. We create resources from kindergarten all the way to university and college across all disciplines. Using the alphabet analogy, from algebra to zoology we have it all, as well as from K to 12. We are owned by the OMERS pension fund, and we represent 1,800 authors in Canada.
To answer your question about the 10 per cent, the 10 per cent really is a guideline. It is a ceiling; it is not a hard and fast line.
Senator Marshall: No, it is not mandatory.
Mr. Reeve: It is not mandatory, but it is something we have to bear in mind because it is very important for us to recognize that if we go over the 10 per cent we lose our exclusivity. I am the subject matter expert on campus bookstores, so higher education is my area of expertise. I have about 25 years in this space so I am an expert in this and I have all the scars and bruises to prove it, if you want to see them.
With regard to that ceiling, we have to pay very close attention. Our campus bookstores are counting on us to pay close attention to that, especially given the world as it has changed from print to digital. Technology is an absolute game changer in our market, and e-tailing is also a game changer for this market. I am a Canadian publisher, and I do not want to have Canadian students buying the same book in the United States of America that I can sell in Canada. We watch that 10 per cent. Currently, we stand far below the 10 per cent, and I am only speaking on behalf of Nelson Canada.
There are moments in time that we creep above the 10 per cent, or sometimes we creep below the 10 per cent, but that is all based on exchange rate fluctuations; and things can happen very fast in our industry because of when books are purchased. Nothing has really changed from when you were all in school. You go to university in September and you buy your books and you go in January and you buy your books for the second semester. That has not changed at all; it is the same thing. You go to the campus bookstore and go down to the basement and look for the courses you are taking. You pick that book and go up to the teller and check out.
There is a very short window of time that our products are actually in that campus store. That window of time can be three to four months, depending on when the books are purchased and stocked. In that three- to four-month window, prices fluctuate. There can be some extreme price fluctuations; and it is hard for Nelson to stay on top of that. The 10 per cent helps to protect our industry and provide stability around pricing. The campus bookstore does not see Nelson increasing prices above the 10 per cent, and they can go around if we do; and they do that. It also protects us so that we are not harmed by major swings and fluctuations in exchange rates.
Senator Marshall: The exchange rate in recent history has been close or near to par for quite a period of time. When you read the regulations, the difference in the price should be accountable by the exchange rate plus 10 per cent. It would seem to me that it should be only a very small amount. Is that correct?
Mr. Reeve: That is correct. Speaking only on behalf of Nelson Education, our average prices are below that 10 per cent threshold.
Senator Marshall: The price comparison between the American price and the Canadian price should be fairly close.
Mr. Reeve: It is extremely close. In terms of the higher education publishers, if we are not extremely close, students will go around and source in other places; and there are a lot of places to source. For example, you can go online and type in any textbook that you have ever thought of and you will find it in about 20 different places. It is available not only in the campus bookstore but also in all sorts of places in all different formats. At Nelson, we even sell a chapter of a book. For $2.95, you can buy a chapter of anything. There are all sorts of moving pieces in terms of the higher education publishing space.
Senator Marshall: Who monitors compliance with that section of the regulations? Is there an independent group monitoring that or is it left up to the honour system?
Mr. Reeve: I cannot speak to that. I do not personally know of a body that monitors it.
Ms. Hushion: The industry self-regulates. If our publishers' customers believe that pricing is out of line, they walk; and publishers know that. I will give you an example.
In 2008, we had currency fluctuations of 24 per cent in just a few months. When these regulations were being negotiated, the person who was drafting them at the Justice Department was talking with us about this buffer, which benefits everyone, not just the publishers. I said, "What if some day, because this 10 per cent had a lot of purposes, we were at par?" Everybody in the room fell down laughing and said, "Sure, in your lifetime." "If that ever happens," he said, "we will have to revisit this because we would have to address that." Well, here we are, and it is in my lifetime. However, our customer base agreed that 10 per cent was fair and sensible because of all the added value that the publishers bring to the imported book in the marketplace and all of the extraneous costs that the publishers have.
Mr. Reeve: It is self-regulated, and we have to look at it all the time. We have data analysts at Nelson that look at pricing on a weekly basis to make sure that we are in line. We hold our prices as firmly as we can. If things start to fluctuate, especially during peak purchasing seasons, we have to act accordingly.
Senator Marshall: You have to regroup.
Mr. Reeve: Yes.
The Chair: If I may ask for clarification flowing from Senator Marshall's question, you said, "if things start fluctuating." Did you mean exchange rates?
Mr. Reeve: Yes, exchange rates start fluctuating.
The Chair: Earlier in an answer to her question you said that sometimes it is a little below 10 per cent and sometimes it creeps above it a bit. You are being given an exclusive right in Canada that impacts on the purchaser here in that the purchaser of the book pays up to 10 per cent more.
Mr. Reeve: Yes.
The Chair: What incentives do you have to keep that below 10 per cent?
Mr. Reeve: My incentive to keep it below 10 per cent is ensuring that the sale stays in Canada.
The Chair: They will walk if it is more than 10 per cent and buy across the border.
Mr. Reeve: Oh, they can and they do.
The Chair: They buy electronically and have it shipped to them, I suppose.
Mr. Reeve: Well, they could do that too. I am talking about large retailers. They absolutely could buy around if we went above the 10 per cent price differential between the U.S. price and the Canadian price.
The Chair: Therefore, 10 per cent is the figure that you think is the breaking point.
Mr. Reeve: Well, that is the point where they are allowed to go around. That is the guideline. That is the maximum threshold and the number that I watch very closely. When I go outside of that, I jeopardize the sale. I have done the work of positioning the product with the faculty and the bookstore, but the bookstore could go to a different supplier for agency product that we bring in across the border from the States.
The Chair: You are saying that your motivation is to keep this as close to but not over 10 per cent so that the 10 per cent is yours. There is no incentive for you to bring that down to 5 per cent.
Mr. Reeve: There is absolutely because of the way that the market is set up, especially with e-tailers. We have a suggested retail price that we communicate to all of our retailers and campus bookstores. It is a discount in that they buy at a net price, which is about 20 per cent off our suggested list price. They would buy a $100-book for $80. Depending on the campus bookstore and its business model, they would mark that back up to the suggested retail price or higher. Amazon or another e-tailer may not mark up to that $100 price point and instead mark up $1 or $2. Canadian students may see the book for $82 or $90 — anywhere between $80 and $100. That is Amazon's business model. They buy it at the same price that I sell it to anyone else. They may use textbooks as a loss leader. In some cases, that is what I think is happening at Amazon in certain quarters of the year. I have to watch the e-tailers — the Amazons of the world.
Senator Marshall: If we are looking at the Canadian price and the American price, can I conclude that the only reason for the difference should be the exchange rate and the 10 per cent? What else would be in there?
Mr. Reeve: I would never be above that to my knowledge. I am only speaking about Nelson Education, but we watch it extremely closely. It is in our best interests to do that.
Mr. Hanson: There is a marked difference between educational publishers for the university bookstore market and traditional bookstore publishers, which are fiction, non-fiction, things you would see in a typical local bookstore or Indigo or amazon.ca. There is motivation not only to price to the exchange rate, but there is also competitive pricing between publishers and there are substitutes for books. If you price a cookbook too high and you can buy another cookbook at a lower price, you will not sell your book, or it will come back.
Many books are substitutable. If I have a pasta book that I price too high, someone else has a lower priced pasta book that people will buy instead. If you price beyond that 10 per cent threshold, the retailer can source that book directly out of the U.S. marketplace. That is sort of the regulator for pricing.
The other thing that is important to realize is that the life cycle of a physical book, from the point it is manufactured to the time it is on a shelf in different incarnations, varies dramatically between children's books and adult trade books. For example, most illustrated coloured children's books are manufactured in Asia and are priced six months in advance of the time they hit a bookshelf. We all know the volatility that six months can bring in exchange rates. Beyond that, that book can live in a warehouse or on a bookshelf for two to three years.
Consumers experienced a shock in 2008. I was the president of the Canadian Publishers' Council and I had to explain what was going on. There was a lot of activity in bookstores because of the printed Canadian price and the printed U.S. price. It may have been three or four years from the time a book was printed to the time it was sold, during which time the exchange rate has gone through a lot of dynamics. At that point, retailers and publishers got the prices adjusted very quickly.
At Simon & Schuster we reset all our prices and we sent retailers cheques to cover the difference in the value of their inventory. As inventory is fully returnable, it can come back if it is not priced properly.
I have documentation in English that I can make available. I used as an example an author that published a book every year between 2003 and 2011. Hopefully you read this author from time to time. Her name is Kathy Reichs and she writes in Montreal.
In 2003, her hardcover book was priced at $39.50 in Canada and the U.S. price was $25. Every year since then, her book prices have dropped. Today her Canadian price is $29.95 and the U.S. price is $27. The U.S. price has been moving up slightly every year and every year the Canadian price is coming down. That speaks to the dynamics of how the regulation works. It brings the prices down.
In real terms, we have had price deflation of about 25 per cent in hardcover fiction in Canada over the past 10 years. Prices have come down dramatically and that is something the industry has dealt with. Some authors sell no more books now that the prices are low than they did when the price was high. With other books there is elasticity to the pricing, so you sell more books because the price is low.
In real terms, prices have come down dramatically. However, because we show both prices, people ask why the price does not reflect the current exchange rate. We cannot change the price daily. We have had dual pricing by publishers and retailers for many years in Canada so that retailers would not have to re-sticker books daily.
The other side of the coin is that a book goes through many different versions. Kathy Reichs is published in three formats in one year. She is published in hard cover at one time of the year, in trade paperback at another time and in a mass market format at another time. Her prices drop for different formats and we can capture the dynamic exchange rate variation in the different print formats that we bring out. However, on a daily basis it is very difficult.
Because we are one of the few industries that dual price, people do not understand why the price does not reflect the exchange rate of the day. It is very difficult.
Last fall Random House published one of the bestselling books and sold it at the same price as in the U.S. However, today the Canadian dollar is worth less than the American, so Canadians are getting a benefit. It does depend. I think that consumers have recognized that because they have not been sourcing outside of Canada as they could online, and Canadian retailers have not been dramatically sourcing outside of Canada as they could if publishers were outside of the guidelines. Prices have really fallen, and publishers are very responsive to the exchange rate because, if they are not, consumers will buy around. The regulation forces us to be responsive to the exchange rate, and there is a lot of evidence to show that it works.
Ms. Hushion: Booksellers, publishers and libraries are by and large, not about the price per se but about these kinds of issues, fairly collaborative. Of course there are natural tensions and frictions, but there are no silos in the industry. There cannot be. That reality is very important.
Senator Ringuette: Mr. Hanson, you were highlighting the issue of the difficulty of pricing. Why would the industry want to have a price printed on a book?
Mr. Hanson: That is a great question. I did not invent the idea. This goes to the openness of the marketplace. Retailers want books from all around the world here when they are available, and the vast majority of those books are imported from the United States. The reality is that most of those books are manufactured and physically imported. The physical act of stickering a book is expensive, and retailers do not want to do that. They want to price the book as a suggested retail price. They do not necessarily sell them for the suggested retail price. As you will see, there are discounts on books all over the place. There are dynamic pricing differences between different retailers.
Retailers such as Indigo sell at prices different from independent retailers, different from Wal-Mart and different from Costco. They use the printed price, in some cases, to show value, and in other cases simply to avoid having to sticker the product.
Senator Ringuette: You pointed out that it is the request of the retailer, but it is the publisher that puts the price on; X in the U.S. and Y in Canada, so it is actually the publisher that indicates the price to the retailer. There is no getting around that.
Mr. Hanson: That is true. The suggested retail price is the starting point from which the discount goes.
Since we do that, as silly as it sounds because it causes so much grief in the marketplace, the benefit to the consumer is that because of that explicit spread we print on the book, it regulates us to bring our prices down when the exchange rate improves. We do not want to advertise a difference. If the publisher wanted to hide a real spread, we would not show the Canadian and U.S. price against one another. We would not do that. It makes no sense. We would actually hide the U.S. price. We do not do that at all. We actually show both. By regulation, we are forced to ensure that the difference is very narrow, and the consequence of that is that prices have been dramatic in coming down in the sector. I will not compare to other sectors of importation, but probably most have not experienced the price deflation we have had in the publishing sector.
Senator Ringuette: On February 14, some of your colleagues in the industry appeared before this committee. I am sure you read the transcript of it. There are five different organizations in the book food chain: the publishers, the importers, the wholesalers, the distributors and finally the retail outlets. Some of them, either publishers, sometimes importers, sometimes wholesalers and sometimes distributors, have exclusive rights. I have not found any other retail organization that has so many organizations in the chain. I listened carefully to you today, and I still do not see why there would be all these groups involved before the book reaches the consumer at the retail outlet. I think there is an issue with regard to this network that has an impact on the price difference. My comment is inviting you to justify the contrary to my statement.
Mr. Hanson: I guess I would say that the marketplace in the United States is no different than the marketplace here. The only difference is that the United States marketplace is the price setter because they do not use the Canadian dollar to set their prices against, as we do when bringing books in. The infrastructure that serves that marketplace is the same as the infrastructure that serves this marketplace.
The definitions that were described in the earlier presentations are confusing, I will agree. A publisher in many cases is the same thing as a distributor. A wholesaler in some cases only does a very minor piece of the activity in bringing a book to the marketplace. It may be just putting the book on the shelf.
The reality is that the publisher, as we know it, is the business that takes the risk of printing the book, marketing the book, typically paying the author, typically shipping the book to the retailer for free, paying for the retailer to sell the book, and when the book comes back it goes back to the publisher. That is the retailer that bears the risk. That is why the publisher is typically the person that sets the price. In the U.S., it is the same.
When you look at all those different pieces, you sort of say this is a very inefficient industry. It is not. Most of the different activities are unique and specific. Of course, it is changing as we go digital, because the physicality of selling is different. However, again, unless I showed you a sheet of how the actual structure of the industry works, it is the same in Canada as it is in the United States as it is in Britain. The only principal difference is that we take a price that is set in another country and we convert it into Canadian dollars, and we have this wickedly changing exchange rate that is happening around it. We have a time frame in which that book is priced that it sits on the shelves and, again, it can be a long period of time.
Ms. Hushion: What you described is what we call the supply chain. The only entity in that chain that has exclusive rights is the publisher. The wholesaler does not have exclusive rights.
Senator Ringuette: The distributors?
Ms. Hushion: As Mr. Hanson said, the publisher and the distributor may be one and the same. For example, in this country, Random House is a net importer of Random House U.S. works, and Random House has published some of our finest Canadian authors who have won the Geller prize. That is an example of a publisher/distributor. That publisher does both. Some publishers do not also act as distributors for other publishers. Many of Ms. Wood's members do not, but many of her members are represented in Canada in the physical distribution by our members.
It is not just a matter of distributing imported books. There are companies in Canada that distribute Canadian publishers' books so that not everyone in the marketplace has to have a warehouse and shipping and all of those overheads. It is a service that some larger companies provide and for which smaller companies pay to ensure that their books are well distributed in Canada.
Only one entity has the rights, and that is the publisher. That is a contractual relationship between a publisher in Canada and another publisher in another country who has given the Canadian publisher the exclusive distribution right for a divisible territory called Canada, and in this case it would be the English marketplace.
The publisher sells to a bookseller. It could be a campus bookseller, Indigo or a small independent. The publisher sells to libraries, but the publisher more frequently sells to libraries through a wholesaler. We have library wholesalers, and their function is to be the intermediate step between the publisher and the library. There are other kinds of wholesalers that Mr. Hanson referred to that take mass-market paperback into the news outlets — magazines, newspapers and paperback books — and they basically just do the stocking. They do not do the marketing, promotion, et cetera.
All of those entities are part of a complex industry infrastructure, but it is a chain and it is a sequential chain. It is only the publisher at the head of that supply chain that has an exclusive right.
There is an entity called BookNet Canada, and its board of directors includes wholesalers, booksellers, publishers and will probably soon include libraries. Ms. Wood and I both sit on the BookNet board ex officio.
Mr. Hanson: And retailers as well.
Ms. Hushion: Yes. Both of our associations have members on the board of directors of BookNet, as does the Canadian Booksellers Association, as does the Association of Canadian Book Wholesalers, because that industry infrastructure has to include all of those moving parts to work properly.
BookNet works together to create efficiencies in the industry, speed up delivery times, to speed up information — called bibliographic data — and to speed up statistics back out to the players in the industry. We have to work together.
In the United States that exact same supply chain exists. The same relationships exist. In New York there is an entity like BookNet called the Book Industry Study Group, BISG, which is exactly the same. I hope that is somewhat clearer than the transcript.
Senator Ringuette: It was clearer on February 14 and it is even clearer today that you have an extensive infrastructure and extensive, progressive supply chain that, from my perspective — maybe I am wrong, maybe I am right — has an influence on the price of Canadian books, especially if the price is decided and is printed on books at your publisher. I would guess most of the books sold in Canada are published by a U.S. publisher, whether they are in the U.S. or has a dot-ca at the end of its name.
Even with all these players, I still do not understand why there would be a price difference.
Let me ask you another question. With respect to Internet purchasing, you do not have all these supply chains or progressive and subsequent players in the game. You only have the publisher because they all deal in real-time purchasing. If I go on the Internet, I want to buy 'X' book and it is delivered to me for sometimes $10 to $15 less than if I go and purchase at Indigo. In one sense, it is justifying the price difference because fewer players are involved in the supply chain, but on the other hand, you still have the publisher at the front end that decides the price. How would you justify this?
Mr. Reeve: I can only speak from the higher education market. In higher education, Nelson Education Canada is a publisher. We publish a lot of Canadian content. When I include the school side, about 65 per cent of our business is Canadian. That is publishing. We publish physical or digital content.
Senator Ringuette: You decide the price?
Mr. Reeve: We decide the price. Yes, we do. It is our content. It is our product. We have physically created it.
We also distribute, and we have an exclusive distribution agreement with a number of U.S. publishing houses who publish, create and set the price.
Senator Ringuette: Is your price higher for your U.S. market or lower?
Mr. Reeve: The prices that come to us are higher than the U.S. market. It is a range. It depends. It is less than 10 per cent, I can assure you.
Senator Ringuette: I want to make myself clear. Given that you publish a book from a Canadian author and there is a demand in the U.S. market for that book, with regard to your responsibility of putting a price on that book, will your price be higher in Canada or the U.S. for the same book that your Canadian publisher has published?
Mr. Reeve: We publish for the Canadian market exclusively, so I do not sell to the United States.
Senator Ringuette: I understood that 65 per cent of —
Mr. Reeve: It is Canadian; 65 per cent or one in six or seven books that we create at Nelson Education is Canadian, written by Canadian authors. All the development and design work is done at our office in Canada. Those resources go to Canadian students, whether they are kindergarten students, high school students or students in universities and colleges.
Senator Ringuette: You are not in the U.S. market at all with your books?
Mr. Reeve: No, we are not.
Senator Ringuette: I misunderstood.
Mr. Reeve: We publish exclusively for the Canadian space. We publish Canadian history, Canadian politics and products like that.
The Chair: Ms. Wood may want to comment.
Ms. Wood: We have members who publish and 50 per cent of the sale of their book would be to the U.S, if this is the example you are looking for. In many cases the price would be the same. Sometimes the U.S. price will be lower because that book will fail in the U.S. at the price point that it sells for in Canada. That is a simple fact. They can decide either to find perhaps only 2,000 readers for that author within Canada or they can find 12,000 readers for that author by going into the U.S. market.
Especially in children's books, the U.S. market will simply not work for the price of the Canadian, so there will be a discrepancy. That is simply the way that a publisher can bring the author's work to a wider audience.
Senator Ringuette: Then it is a given, a natural statistic, that a publisher will ascertain a price for a book in Canada that is higher, whether it is a Canadian or U.S. publisher?
Ms. Wood: It depends very much on the case.
Senator Ringuette: Give us a good example.
Ms. Wood: Where they do not charge more in the U.S.?
Senator Ringuette: Where they would charge more for a U.S. book that they published in Canada.
Ms. Wood: I can imagine a scenario, but I cannot say authoritatively that I can give you an example off the top of my head where the price is higher in the U.S.
I would think that for certain reference books, in an institutional environment perhaps, that will mostly go to a university library would have wider acceptance. The Historical Atlas of Canada, which was a very expensive production done by University of Toronto Press in the 1980s over several volumes, can bear a high enough price in the U.S. and it sold many more copies in Canada because it is of greater interest in Canada. I cannot recall whether that was the case or not, but a book like that might have a higher price in the U.S. For a market that really needs that book — because they are an academic library with a big geography or Canadian studies department — that might bear a higher price in the U.S.
Senator Ringuette: Okay.
The Chair: Thank you very much. Next I will go to Senator Callbeck from Prince Edward Island.
Senator Callbeck: I want to go back to dual pricing.
What is the average discrepancy or difference — the range, the spread, whatever you want to call it — between the U.S. and Canada, with the new books that are hitting the bookstores right now?
Mr. Hanson: I thought you might ask that question. I did a spot check. The best-selling books right now in Canada are the books being sold by Scholastic, Suzanne Collins' The Hunger Games books. The movie has created great demand for these books. The Hunger Games was published three or four years ago, and there are three subsequent books. The U.S. price is $17.99, the Canadian price is $19.99, and the price is 1.11.
Senator Callbeck: Did you say $17.99 and $19.99??
Mr. Hanson: Yes, and that is 1.11. I am not speaking for how Scholastic prices their books, and remember that every publisher prices differently. $17.99 is with a U.S. publisher, that is Scholastic; Random House may charge $22.99.
Last fall, the best-selling children's book was Inheritance by Christopher Paolini. The U.S. price was $27.99; the Canadian price was $27.99.
The best-selling nonfiction book was published by Simon & Schuster last year. It was the Steve Jobs biography. The U.S. price was $35; the Canadian price was $36.99. The price difference was 1.06. You can see there is range, but they are fair. We do customized Canadian marketing to make sure Canadians are aware of those books, the Scholastic house and so on.
I went to Amazon for these pricings just to see what they were doing.
I looked at a book called Thinking Fast and Slow, a new non-fiction book that is very hot at the moment. It is a Random House book. There is a spread of 1.11 between the U.S. price and the Canadian price.
Just doing spot checks, most of the pricing is between 0.05 and 0.09. It depends on the publisher and the category. Some of them are at parity. On my list, you will see books that I publish, such as David McCullough's book. He is a major American historian. I publish him at parity because there is a very succinct audience for his books, but pricing varies.
Sometimes you cannot price a book to 0.1 or to parity because it does not make sense. You would have a book priced at $33.93. It does not make sense. You have to price to where consumers live and sometimes you round down or you round up. It just depends on how you do it.
I think that you are seeing this dynamic pricing down, which is what we all feel in our businesses because our margins are tighter.
Senator Callbeck: You are saying the range is between 0.05 and 0.09?
Mr. Hanson: Yes. I tried to have BookNet run a report because it is an industry service that could run the report, but they do not measure U.S. pricing. They did measure the transactional price of books being sold, and it has been deflationary, as I explained earlier.
Senator Callbeck: If you were going back five years, what would that range have been?
Mr. Hanson: That is a good question. Using 2006, on the exchange rate, it was probably in the 1.3 range. That was against the exchange rate. Again, the pricing is dynamic to what the exchange rate is at that period of time, so it really depends.
I remember back in 1995 when the Canadian dollar was depreciating. I was working with a company buying computer books. We were buying books at a certain rate from a U.S. company and we were selling, but the Canadian dollar started to fall and the publisher was on the wrong side of the appreciation value. We were underpricing. We were buying inventory that we could not sell against.
What we had in the 1990s was the dollar dropping. In the 2000s, it was the dollar appreciating. From a week over week basis, I do not really know where the exchange rate is going. The volatility is pretty dynamic. If I really knew, I should probably get out of publishing and go into futures. We have become very knowledgeable about pricing, probably more so than any market in the world.
It is a very nuanced business. Sometimes you know you are printing a book that has a shelf life for 24 months and sometimes you are printing a book that has a shelf life of 3 months; so your decisions vary by that because you are trying to figure out where exactly this book is going to be priced over a period of time.
I will also say that in 2008, when the price changed so dramatically, some of those books were priced three years prior to that when the exchange rate was 1.55. As a publisher, we basically re-set our prices and we gave all the retailers monies to cover the difference in price. I said, "You can sell it for whatever you like. I am not telling you how to set your price, but if you return that book to me, it is at the new price that I have established."
Other publishers gave the retailers discounts to cover the differences that the retailers had to discount to make the books competitive to consumers so that consumers did not shop across the border. That whole exercise, which was really dynamic because we had not been there before, did seem to work. The activity of buying around in books is not dramatic. The reality and the numbers show that purchases of books in Canada are as strong as ever, despite all the technological change. In fact, unit sales with the print and the electronic are higher now because it is another form of actually accessing the titles. I think that is a positive and speaks to the healthy ecology between all the different stakeholders in the system.
Again, the system works because if publishers priced beyond the thresholds, the market just self-selects outside of Canada. Because we are forced into that, prices come down dynamically against the exchange rate in very rapid format. The only difference between pricing is the time of the decision from when the price was made, which typically on most books is two to three months before they hit the store. That is the time frame that the book is manufactured to the time it hits the street, as it were, and that is three months.
The Chair: Senator Callbeck, are you going to another matter now? You still have the floor, but Senator Hervieux-Payette had a point of clarification.
Senator Hervieux-Payette: I was wondering, who is losing when Costco sells at a much lower price?
Ms. Hushion: That is a good question.
Senator Hervieux-Payette: Is the publisher losing?
Mr. Hanson: We all sell to the retailers at a discount range. This is for trade publishing, at a very narrow discount range. In Canada you can sell discounts based on volumes. Some of the larger retailers would get a slightly higher volume discount, but when Costco decides to have a low margin to sell to consumers, that is a benefit to the consumer. If Costco decides to sell higher, that is a benefit to them. I do not dictate to them what they sell it for. In some cases, as Mr. Reeve alluded, some retailers use books as a loss leader. In some cases, you can buy a book online for exactly the same price the book was purchased from the publisher because they are not necessarily trying to make money on that purchase. They are trying to make money obviously in something else. That is why there is such a difference in pricing to the consumer from the perspective of the consumer. However, I think that is healthy retail business, because you would see that in most areas.
Senator Hervieux-Payette: The bookstores do not like it.
Mr. Hanson: The bookstores that do not discount do not like it, for sure.
Senator Callbeck: We had witnesses here that talked about the retail price for certain books in the United States being lower than the wholesale cost of those books in Canada.
Ms. Hushion: That is dumping.
Senator Callbeck: Does that happen very often?
Mr. Hanson: In Canada, the answer is, very rarely would you see that. In complete candour, if you had a retailer who was buying the book and selling it for what they bought it for, and saying "I bought it for 50 per cent of the cover price; I am selling it for 50 per cent of the cover price," and if the dollar was at parity at that particular time and that book had a 1.1 markup in Canada, yes, on a straight exchange rate basis it would be lower in the United States.
However, that does not happen very often, because most retailers are not in the business of losing money.
Senator Callbeck: If they did, they are not going to be there.
In our notes from the Library of Parliament, there is the breakdown of the price of a book in Canada.
The Chair: Senator Callbeck, we will give them a copy of that so they can follow it. It is table 1, prepared by our researchers. We would just like you to take a look at that.
We have some more to share with you.
Mr. Hanson: I teach this stuff, so I know it pretty well.
Senator Callbeck: Okay. It says here the royalty is 10 per cent. I would like you to comment a little bit about what the author gets.
Ms. Hushion: You need to look at this.
Senator Callbeck: Is there always a royalty or are there times when they get a lump sum for a book and that is it? What is the situation?
Mr. Hanson: Typically there is a royalty. Some publishers commission work with no royalty, but typically there is a royalty. The royalties vary. Sometimes they are as low as 6 per cent and sometimes they are as high as 22 per cent. Honestly, they do vary. Just like in baseball, the bigger stars get more money and larger advances.
Most publishers pay large authors more money in royalty than they ever sell to offset. The publisher just pays more to get that author on their list. Most authors will earn royalties that the publisher never sells books against. That is one of the things to bear in mind.
The Chair: Do you ever come up with an average figure that we could use for our calculation purposes?
Mr. Hanson: The reality is that each book is different. There is only an average when you take all of them and bring them together. Some books are written 100 years ago and their royalties have earned out many times over and there are estates we pay. With some authors, we have profit-sharing agreements. Some authors we pay immense amounts of money and we sell very few copies.
The Chair: Your answer is there is no average.
Mr. Hanson: Everything is unique. That is what makes it a fun industry. It is one that is heavily weighted with risk because what books will do in the marketplace in terms of what happens and what you imagine happening are completely different. Sometimes you become a Stephen King, but more times than not, you do not.
The Chair: But tonight we have Senator Callbeck. She has the floor.
Senator Callbeck: The royalty you say can be anywhere from 6 to 22 per cent. Do you have any comments on any of those other figures?
Mr. Hanson: It varies in terms of what the bookseller sells the book, so it really does depend.
The Chair: We are asking you to assume that the book is selling for $10. We want to get a distribution of where the funds would likely go out of that $10.
Mr. Hanson: It is all in the range, plus or minus, depending on each structure. It should be noted that each distributor, like a Canadian distributor that takes on books, has different buy-sell agreements to have their exclusivity. The profitability of each distributor that brings a book in for exclusive distribution is completely distinct.
Not all publishers are built the same way. Not all distribution agreements are the same. Therefore, the share of the monies that are taken by the distributor vary by the agreement that they have made to gain the exclusive distribution.
I am not trying to complicate matters, but it is complicated because it depends.
The Chair: Is anybody left out of this list that dips into the $10?
Ms. Hushion: It is not —
The Chair: Let us let Mr. Hanson finish first and then I will go to you, Ms. Hushion.
Mr. Hanson: I guess the only thing you need to understand is that figure is for a sold book. When you look at the overall averaging, when you have all the books sold, 35 per cent of books are not sold and are returned. When a book is sold, these numbers look correct. However, 35 per cent of books are not sold and, of that, you have to recognize that many books have 100 per cent sale. For example, my Steve Jobs book had a high efficiency of sale; it had a 95 per cent efficiency of sale. However, another one of my authors had a very low efficiency of sale. It changes.
Some authors have 80 per cent returns; some have 50 per cent returns. On the average, if your business works, you kind of come to a place where you have made some money. Sometimes you do and sometimes you do not. The margins are very thin because of the risks involved. Also, the technology changes that we are encountering create a lot more risk.
When we have the policy about exclusive distribution, we partly want to maintain the territoriality when we make investments to market authors, because if somebody sources outside of the marketplace and basically brings in product that we have marketed and taken risks on, if that agreed to territoriality is not assured, it brings even more risk into the equation.
The Chair: Ms. Hushion, you had your hand up? Did you want to intervene?
Ms. Hushion: I was going to make one of the points that Mr. Hanson just made.
I will say two things. In the 1980s, there were lots of these exclusive distributor agreements between Canadian and U.S. publishers. The Canadian publishers brought a tremendous amount of inventory into Canada. A lot of the Canadian customer base, be it booksellers, libraries, governments themselves — the Department of National Defence was one I got involved in — would source those exact same books outside of Canada. The price was not usually even better; it was a habit.
The Canadians who were investing in the industry never knew when they went to bed at night whether they would have any integrity of their own marketplace in the morning. They made plans and spent money, but for all they knew, all the copies of a particular title that they put out there might come back or, worse, they might not ever send those copies out of the warehouse in the first place because the bookseller, the library or whatever — the customer — was buying them from the point of origin.
As I said, it was not all about money. Government had a look at this and did a big study of import-export data. They determined that a lot of it was habit. I think that is important to know, because the people in Canada who are making the investments need to be able to have some sense that they will get an acceptable — in our case, marginal — return on that investment. It is our country. Nobody in our industry is getting rich quick or attempting to pull the wool over the eyes of Canadians.
What I really wanted to ask was, is it fair if we ask a question? May I ask a question?
The Chair: It is not usual.
Ms. Hushion: May I be unusual, then?
The Chair: We can entertain it. Right now Senator Callbeck has the floor, and she is asking questions. When she finishes we have Senator Ringuette who has also requested to have a clarification. When that is finished, Senator Chaput would like to ask a question. At the end of that, I would be pleased to entertain your question.
Ms. Hushion: Thank you.
The Chair: Senator Callbeck?
Senator Callbeck: I am all finished.
The Chair: Thank you. Senator Ringuette.
Senator Ringuette: Mr. Hanson, is this return policy unique in Canada? Is it unique in North America? Is it the same business arrangement in other countries, such as the U.K., Australia, and so forth? Is it your typical business agreement that the retailer will send back books that are not sold, and you have to refund what they paid for that book?
Mr. Hanson: Yes.
Senator Ringuette: It is? It is the same scenario all over the world?
Mr. Hanson: Yes.
Senator Hervieux-Payette: What do you do with the book?
Mr. Hanson: Sometimes you look at them and say, "Why did I do that?" Sometimes you sell them as what is called remainders. You will see books at very cost — they cycle back — but typically the books are recycled.
Senator Hervieux-Payette: Garbage.
Mr. Hanson: Yes, they are shredded, and there are very many ways you can do that. I take all the young students to the warehouse to show them the recycling bin. That is evidence of the risk of the business. If you put it out at there with the wrong price, at the wrong time, with the wrong jacket and the wrong marketing plan, good chance it will come back.
The Chair: Thank you for that clarification.
Senator Chaput: Lately, mostly in bookstores in airports, I have seen instances where you buy a book and there is a big sticker on it that says once you have read it, bring it back and you will have 50 per cent off on the other book. Is this a trend? I have been seeing this for the past few months. Who does not make the money on those books? Who loses there?
Mr. Hanson: In that instance when we sell a book to a retailer, in this case, an airport retailer, they can do whatever they like with that book. I would not call it necessarily a trend. I think airport retailers are specifically responding to the challenges that they are facing because of digital reading devices that people who travel use, and the retailers are trying to be creative as to how to maintain their customers. However, it is in their purview to do with those books what they will.
Senator Chaput: Do you have members that are Canadian exclusive distributors for American books imported into Canada? Are some of your members only selling American books imported into Canada? Would you have Canadian exclusive distributors for American books imported into Canada, so they would be selling only American books?
Ms. Hushion: Only American books? We do not have anybody who is selling only American books. It could be only imported books but not only American books.
Senator Chaput: They could be imported books but not necessarily American.
Ms. Hushion: Not necessarily American books.
Senator Chaput: What percentage of your members would that be?
Ms. Wood: We do not.
Senator Chaput: You do not?
Ms. Wood: Our members are required to publish original Canadian material. That is a requirement for ACP. I cannot speak for the others.
Senator Chaput: Thank you.
The Chair: Ms. Hushion, do you have that same requirement?
Ms. Hushion: Our requirement is you must publish but you do not need to be Canadian-owned, and twice in the history of our bylaws when we have changed membership criteria either to add a category, like affiliate or associate, or to subtract a category, we have made adjustments that would grandfather people who were already members who do not meet the new criteria. In other words, we would not ask anyone to depart.
The Chair: There was one other point before I go to your question.
Mr. Hanson, you said that in some instances you would have the same price for Canada and the U.S. Do you in that instance put the price on there, or is it necessary?
Mr. Hanson: As the exclusive distributor for Simon & Schuster books in Canada, that is, Simon & Schuster Canada, our job is to make relevant to Canadians those books that we are bringing in from the United States.
We do that in part by setting a price that meets the criteria of what Canadians would be prepared to pay. We do that through marketing. We do that through publicity. We do that through, in some cases, changing the jackets to make them contextualized for Canadians. That is one of our jobs.
In some cases, we would price a book so that it makes sense for Canadians to buy it at that. In many cases, there are certain price thresholds that I know Canadians do not want to pay more than, and so I will price concurrent to the U.S. price because that is the price that Canadians want to pay. It is dynamic to the consumer, not just dynamic to the exchange rate.
The Chair: Do you have that suggested retail price on the label?
Mr. Hanson: Yes, I do, because in that case I am showing the consumer exactly what I am pricing it at. That is just evidence to show that I am pricing fairly. However, it is a free-for-all in the marketplace, and one thing we have not told you is that if you buy the rights from a foreign author to publish in Canada, you can charge whatever you would like for it. That right of publishing a foreign author in Canada, securing the publishing rights in Canada, not just the distribution rights, enables you to publish the book at whatever price you would like. You put a suggested retail price, but typically you do not use the U.S. price in that case.
The Chair: We are still trying to struggle with this issue of why consumers are paying more and why they are going to the U.S. or offshore to buy products. We are trying to get to the bottom of all of this. That is the purpose of all of these questions.
Ms. Hushion, you have a question that may help us in that regard, in that manner.
Ms. Hushion: I do not know.
True story: I was in my local hardware store recently, and it is an independent, not a chain store. A gentleman came in and said to the owner, "I want to buy this," whatever it was — it was the name of a special tool — "and your price is $79.99, and I checked online this morning, and I can get it online for $49.99. You are my local hardware store and you have been for a long time and I want to support you, but I cannot support that difference." The hardware store owner said, "Look, you know, I have a lot of costs in getting that" — whatever it was called — "into this market, so I cannot sell it to you for the same price that you can buy it for online. However, I do not want to lose you as a valued customer and member of my retail community, and I would like to think that I do other things that benefit you that you appreciate, so I am willing to split the difference with you, and I will sell you that tool for half of that difference." I did not know this fellow. I was just eavesdropping, and he said, "You know, that is fair. I want to support you, and okay, I will buy it from you." That was the deal that they made.
It is my understanding that even though we do not see dual prices on goods, the vast majority of goods that are available in Canada from the United States cost more here than they do in the United States just by virtue of getting that inventory physically over the border, cleared, here and into a retail or wholesale outlet.
I am sorry about the long preamble but my question is whether the dual price on books makes us so much more visible as magazines used to be and greeting cards. Is it that, or is it something else? I do not know other American goods available in this market that are priced at exactly the same in the U.S. and Canada.
The Chair: Well, I guess there are two things.
Ms. Hushion: I assume I am going to have to pay more.
The Chair: The dual price certainly makes it more visible, and it has been brought to our attention by many as to why there is this dual price. Then there is this 10 per cent issue that we have talked about quite a bit today. We are trying to get a little bit of an understanding on that. It was established at a time when there was quite a variance in exchange rates, and now there is not and has not been for some time. Do you still need that 10 per cent? Those are the questions that I do not think we have a consensus on but that we are thinking about here.
Ms. Hushion: I guess the exchange rate could go the other direction when we least expect it.
The Chair: Absolutely, it could.
Ms. Hushion: Who knows? As Ms. Wood said, this complex industry is an ecosystem, a term she uses. It is a very good one.
If we removed that or reduced that or whatever in the regulations and then we had a crash in the context of the exchange rate, we would be in big trouble.
The Chair: I guess that is the question that we have to answer, and maybe you can give us some guidance on, is what would happen if that 10 per cent was changed to 5 per cent? What would happen in your industry?
Mr. Hanson: We have seen that the volatility of the exchange rate goes much beyond that. No one would have predicted the degrees of volatility we had in 2008. I think it was a point spread of 25 per cent in terms of distant exchange rate points between the highs and lows of that year. I think we went to 0.08 at one point at that time. It was very dynamic.
We all know the different factors that can affect exchange rate. They certainly have nothing to do with book publishing. We just react to that. In real terms, I guess I can say that book prices have been dynamically coming down, and in the U.S. they have been going up. In the context of that, I hope it gives confidence to you and to the consumers that there is this methodology that serves our industry, to serve exclusivity aspect of territoriality that manages both the health of the sector, in keeping it consistent, whole and in Canada — rather than a free for all and people bringing in books from all over the place — but also protects the consumer in that book prices do dramatically come down. That happens on a day-in, day-out basis because we are looking all the time. If we are not looking, someone notices we have not looked and they source around us.
Again, it does not happen much. The sourcing around does not happen much because the people working in the industry, through all the different competitive companies, are working in that dynamic formula that serves everyone in the sector.
Senator Marshall: I have a question that I have asked other witnesses and no one has been able to explain.
With respect to magazines, would either of you know anything about magazines? There is quite a price discrepancy. A lot of the magazines come out weekly or monthly, and the American prices are always significantly lower than the Canadian ones.
Ms. Hushion: We work with the magazine sector in a number of ways, but I cannot speak on behalf of them. They do have an association, Magazines Canada.
Senator Marshall: I thought I would ask the question.
Ms. Wood: I would suggest that they have perhaps parallel issues in terms of higher costs and a smaller market; the same disparity that we struggle with. They are also an advertising-based medium where we are not. When changes affect that sector, that directly impacts on them, too.
I would imagine that, in the last five years, those circumstances have made that gap perhaps bigger, but I do not really know. I am making this up, just guessing.
Senator Marshall: Thank you.
The Chair: On behalf of the Standing Senate Committee on National Finance, we would like to thank you very much for spending the last two hours discussing pricing of books here in Canada. If we do have some points that we might want to follow up on, I hope we can get in touch with you. If you have any other thoughts you want to send to us, feel free to do so through our clerk and it will be distributed to everyone.
Mr. Hanson, you had some material. If you get that to our clerk, we will get that translated and distributed to everyone. That would be helpful to us in seeing that dual pricing and comparisons.
We have been hearing from the Canadian Publishers' Council, Mr. Hanson and Ms. Hushion; from Nelson Education Ltd., Mr. James Reeve; and the Association of Canadian Publishers, Ms. Carolyn Wood. Thank you to all of you for being here. The meeting is now concluded.
(The committee adjourned.)