Book industry strategy group




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Book industry strategy group

FINAL REPORT TO GOVERNMENT

SEPTEMBER 2011


© Commonwealth of Australia 2011

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Department of Innovation, Industry, Science and Research, GPO Box 9839, Canberra ACT 2601.

ISBN 978-1-921916-21-2

DIISR 11/129


Editing by Wilton Hanford Hanover

Design and artwork by GRi.D

Printed by Elect Printing, Fyshwick

Acknowledgments

The Chair and members of the Book Industry Strategy Group would like to acknowledge the generosity of the following organisations in providing data for the research into the Australian book industry:

» Australian Publishers Association

» Copyright Agency Limited

» Nielsen BookScan



Printed on Pacesetter Satin, which has ISO 14001 (Environmental Management System in use), FSC (mixed sources — product group from well-managed forests and other controlled sources. Also produced using elemental chlorine-free (ECF) pulps.

Letter
Senator the Hon Kim Carr

Minister for Innovation, Industry, Science and Research

Parliament House

Canberra ACT 2600


Dear Minister

On behalf of the members of the Book Industry Strategy Group, following the review requested by you in April 2010,
I present the Group’s report on the Australian book industry.

In setting up this review, you asked that the Group assess the impacts of digitisation on the whole book supply chain. Since work began on the review, the speed of change has escalated and major impacts have already been felt within the Australian industry. The closure in Australia of 130 Borders and Angus & Robertson bookshops, although not solely resulting from digitisation, demonstrates the scale of change that is occurring.

The findings and recommendations contained within the report reflect the need for government and industry to work together to achieve the reforms required for the Australian industry to compete effectively within the global market. The industry recognises the need to innovate and to invest in infrastructure to sustain a local industry which, in turn, supports the development of Australian content and creativity.

In presenting this report to you, I would like to acknowledge the dedicated contribution made by a broad group of people. First, I thank the members of the Group, especially my Deputy Chair, Louise Adler, who made a major commitment of time and resources to produce this report.

In addition, I recognise the contributions made by the hundreds of consumers and industry operators who participated in the Group’s consultations. Officers from your Department were exemplary in their support, energy and expertise. The Book Industry Strategy Group records its appreciation to you, and them, for providing the resources to make its work possible. I am also grateful for the work of my technical adviser, Dr Dennis Perry.

Yours sincerely



The Hon Dr Barry Jones AO

Chair, Book Industry Strategy Group

30 September 2011

BISG members

Ms Louise Adler, Deputy Chair

Mr Philip Andersen

Mr David Barnett

Ms Lorraine Cassin

Mr Graeme Connelly

Mr Tom Crago

Mr Alan Fahy

Mr David Gaunt AM

Mr Ross Gibb

Mr Alexander Grant

Mr Angelo Loukakis

Mr Emmett Stinson

Mr Chris Warren

Contents

Contents 5

Executive summary 7

List of recommendations 9

Prologue: Cultural development and creativity in
the digital revolution – a personal perspective 13


1 Introduction 18

Note from the Chair 18

The scope of this review 19

Policy background 21

2 Economic contribution of the industry 23

Sales income 23

Exports 26

Employment 27

Investment and innovation 28

Regional impact 28

Economic contribution by subsector 29

3 Current operating environment 33

Technological change 33

Changing consumer preferences 35

Emerging trends in digital readership 37

Response by the Australian book industry 41

A competitive environment 45

Commercial uncertainties 49

Copyright and piracy 50

4 Book industry SWOT analysis 52

Part 2 54

5 Industry transformation strategy 54

Competitive advantages 54

Opportunities 54

Actions 55

Industry outcomes 55

The future 55

6 Recommendations 58

Integrating the book supply chain 58

RECOMMENDATION 1: Book industry collaboration 58

Competing effectively in the global book market 60

RECOMMENDATION 2: GST and price 60

RECOMMENDATION 3: Postal rates 63

RECOMMENDATION 4: Parallel importation of books 64

RECOMMENDATION 5: Export support 65

Improving supply chain efficiencies 68

RECOMMENDATION 6: Book distribution network 68

RECOMMENDATION 7: Digital infrastructure 69

RECOMMENDATION 8: National university press network 71

Rewarding and protecting creativity 74

RECOMMENDATION 9: Digital copyright protection 74

RECOMMENDATION 10: Lending rights for ebooks 75

RECOMMENDATION 11: The statutory licence for education 76

RECOMMENDATION 12: Protecting copyright online 77

Supporting the business environment 79

RECOMMENDATION 13: Digital skills development 79

RECOMMENDATION 14: Statistical data 80

RECOMMENDATION 15: Small business development 80

RECOMMENDATION 16: Book print industry reform 82

RECOMMENDATION 17: Digital content for schools 84

RECOMMENDATION 18: Tertiary education materials 86

RECOMMENDATION 19: Tax support for authors 87

Supporting Australian culture 91

RECOMMENDATION 20: Literature Board review 91

RECOMMENDATION 21: National Book Council 92

Appendix 95

Appendix A 95

The Book Industry Strategy Group 95

Appendix B 96

Addressing the Book Industry Strategy Group terms of reference 96

Abbreviations and acronyms 105

References 106

The Book Industry Strategy Group’s terms of reference recognise that digital technologies are changing the way
books, both printed and digital, are being produced and delivered, and the expectation that books delivered on digital platforms will command a growing share of the market.

The terms of reference are:

1 What digital platforms for books are available in Australia, how they work, what features they offer, and how extensively they are used.

2 How fast the market for digital delivery of books will grow in Australia and internationally, what factors might slow or hasten that growth and what is the relative position of printed books.

3 The potential size and structure of the Australian digital and printed book markets, taking into account (a) demand from individuals, libraries, government agencies, and research, educational and cultural institutions; (b) the needs of the aged and people with disabilities; and (c) the needs of regional and remote communities.

4 How the supply chain for trade, educational, scholarly, scientific and technical books has been, and will be, affected by digital technologies, taking into account the impact on authors, publishers, printers, wholesalers, retailers and consumers.

5 Options for encouraging efficiencies in the supply chain for printed books, integrating it with digital delivery of books on a global scale, and increasing the overall competitiveness of the Australian book industry.

6 (a) How business models are likely to change in the digital environment; (b) how this is likely to affect business models for printed books; and (c) what can be done to facilitate these changes.

7 Opportunities for the Australian book industry to participate more actively in the global marketplace for printed and digital books over the next decade, including by creating, adopting, and using new technologies.

8 How existing Commonwealth programs and activities can be refocused to support the industry’s adaptation to new technologies.

Executive summary

The traditional book supply chain in Australia – authors, publishers, printers, booksellers – is changing at an unparalleled pace. The emergence of digital technologies is affecting book production, publishing, distribution, marketing, communications, online retailing and consumption. In addition, digitisation and globalisation are eroding the protections formerly provided by Australia’s geographical barriers, forcing its book industry to compete in the global marketplace. In spite of these changes, the impacts of digitisation and globalisation are creating, and will continue to create, opportunities for the book industry.

However, books are more than an industrial output, as conventionally defined. The book culture must be stimulated and transformed. Publishing must not be looked at only in terms of its economic value but also of its relationship to culture and education in general. The opportunities presented by the digital revolution should be welcomed and the publishing industry should be moving fast to adapt. Publishers, governments and institutions should be looking for imaginative links between themselves, including, for example, opportunities for Australian universities to combine to create a major academic publishing house for ebooks and print books.

In order for the Australian book industry to continue to serve its critically important cultural and educational role, its economic viability must be assured. In the current environment, where protective barriers brought about by distance or other market protection mechanisms are being lowered, continued economic viability simply means achieving the most efficient and competitive connections between content creators and consumers, whether local or international.

Over the past decades, and particularly since 2000, the Australian book industry has been very successful at making these connections and, as a result, has created value for the Australian economy. This value is represented through sales income, exports, and employment. While investment data are lacking, book printing, distribution, publishing and, more recently, booksellers are investing in new technology and adopting innovations to assist in adjusting to the new operating environment. Finally, book printers continue to make a significant contribution to supporting regional development in areas where their facilities are located.

In 2010, the total value of books sold in Australia (in both print and electronic formats) is estimated at $2.3 billion. This is expected to grow to $2.8 billion by 2014, with an increasing contribution estimated at 24.3 per cent of that total comprising ebook sales. The factors that will influence this growth include the state of the Australian economy, consumer preferences, tablet and ereader penetration, the availability of ebooks and the potential substitution of print books by ebooks.

In 2010, Australian book publishers exported an estimated $225 million in books. Of this, approximately two-thirds (or $144 million) were trade books, and the remaining third (or $80 million) was educational books. Total book exports accounted for 12.2 per cent of publisher revenue in 2010. Despite performing strongly during the early 2000s, the value of Australia’s book exports did not keep pace with the value of Australia’s total merchandise exports over that past decade. However, the value of book exports increased at a stronger rate than the value of exports for miscellaneous manufactured articles and food and live animals. The key markets for the export of Australian books, in order of size, were the United States, New Zealand, the United Kingdom and Canada.

Approximately 25,000 people were directly employed in the book industry in 2010 through authoring, printing, publishing and retailing. However, there is also significant indirect employment in the book business. The employment contribution of the book industry is particularly significant in book printing. The industry has a regional impact in communities such as Maryborough in Victoria, where McPherson’s is a major contributor to that region’s employment.

Innovation in the production, distribution and accessing of reading material is forcing more changes in the local industry. In recent years, the major book distributors have invested heavily in improving the efficiency of their distribution networks. Online book retailers have also emerged in the domestic market and are investing in digital and online sales facilities while others are initiating innovative, collaborative arrangements with other players to improve competitiveness. New online book sellers include Booktopia, TheNile , QBD, Boomerang Books, Dymocks, Borders/Angus & Robertson (now owned by Pearson), Fishpond and Collins.

Book printers have also increased their investment in new technologies to improve their capacity to respond quickly to market demands. These investments have been in digital and print-on-demand technologies. Local investment opportunities are also attracting overseas investors to the Australian book market. For example, on 16 June 2011, US-owned wholesaler Ingram announced the opening of its Lightning Source Australia printing operation in Victoria.

The operating environment for the book industry is changing at a rapid rate. These changes are being driven by technology that is challenging the established notion of a book, which can no longer be defined only as a physical object with printed pages between two covers. This new notion of a book, combined with more reliable and safer ecommerce transactions, has facilitated major changes in how books are produced, distributed, sold and accessed. The technological changes have had two major effects on the book industry. First are the opportunities to change the supply chain and create new business models; the second is the globalisation of book markets. A third related impact is the weakening of territorial copyright regimes.

These changes are now evident in the Australian book industry. In Australia, ebook sales made a slow start, largely due to the lack of acceptable reading devices. However, since October 2009, when Amazon released its Kindle eReader globally, a wide range of ereader options have flooded the Australian, and most other, markets, and ebook sales have increased correspondingly. Australian consumers now have access to a broad range of ereader devices. It is expected that the growth in ebook sales in Australia will accelerate now that a broader infrastructure has come into place to support consumer adoption of ebooks.

The challenges confronting the book industry do not occur in a vacuum. They are part of a broader pattern of change within the media and creative industries. These changes do not undermine demand for creative content, but they are challenging the business models that have sustained profitable industries, such as newspapers or free-to-air television. The pressure on the broader industry both flows over to the book industry and acts as a feedback loop, intensifying the challenges the book industry faces.

While technology is an enabling force, consumer preferences are driving the changes in book production, distribution and consumption. According to the Australian Consumer and Media Authority, four in five Australians have access to an internet connection at home and are increasingly embracing the digital economy. Between November 2010 and May 2011, 88 per cent of household internet users carried out one or more ecommerce activities and 69 per cent purchased at least one good or service. The authority found that age, gender, household income, level of education and employment influenced the level and way in which consumers engage in ecommerce. In general, consumers with higher levels of education, income and in some form of employment were more likely to engage in ecommerce.

The survey conducted for the Book Industry Strategy Group by TNS Global confirmed a number of the authority’s findings. Australian men were more likely to purchase an ebook, and younger age groups (between 18 and 34 years) purchased as many ebooks as all other age groups combined.

Individuals who made submissions to the Book Industry Strategy Group generally embraced digital technologies such as ebooks and purchasing books online. A majority of respondents in the category of ‘individuals’ said they read ebooks, and a significant majority noted that their use of ebooks complemented their use of print books. Those who have embraced ereading technologies said that ebooks were convenient to access, easier to store and search,
and were hugely beneficial for people in remote areas or with disabilities.

A majority of respondents saw great benefits in ebooks, but consumers have expressed some frustration with the transition to digital books. Some of their key concerns include the myriad of ebook formats and device interoperability; high initial start-up costs to purchase ereading technologies; a lack of titles available for download in Australia; and the price of ebooks, particularly as they have no resale value and sharing is difficult.

Consumer groups, including libraries and educational institutions, identified significant benefits from ebooks and digital technologies, while noting the drawbacks relating to access, affordability and copyright.

The Australian market for ebooks is expected to grow, but this growth will depend on a number of factors, including the penetration of ereaders and the availability of ebooks. Drawing on the available evidence, the market research conducted for the Book Industry Strategy Group concluded that in the short to medium term, ebook sales are likely to expand the total market for books. However, the longer-term scenario for the impact on printed book is unclear.

According to PwC (2011) the market forecasts for the international ebook market project that ‘the worldwide ebook market [will] grow at a compound annual rate of
42 per cent from 2009 to 2012’, increasing from approximately $4.6 billion in 2009 to $13.2 billion in 2012.

The Australian book industry has been adjusting to these technological changes, and digital technology is employed to varying degrees along the supply chain. Australian authors make extensive use of digital technologies in their work. The publishing sector is also employing digital technologies, although the impact of digital platforms varies between publishing subsectors.

To remain competitive, Australian book printers have adopted a wide range of digital technologies. Digital printing allows books to be reprinted economically in small numbers; set-up costs are lower, and the cost per copy is more constant across the print run. However, in spite of these changes, the Australian book printing industry is also finding it difficult to compete on price with overseas printers, especially in China. As a result, over the past two decades revenue generated by the book printing industry has declined gradually, from $250 million in 2001 to $220 million in 2010, because of the increasing use of overseas printers by Australian publishers.

Australian book retailers are experiencing the greatest impact of digitisation, ebooks and ecommerce. During the past decade, the bricks-and-mortar firms have been joined by a number of Australian online-only book retailers, some of which have enjoyed rapid growth. However, existing bricks-and-mortar bookshops have been slower to change and are experiencing greater competitive pressures from international, online retailers. The competitiveness of Australian booksellers is likely to be further challenged by the proposed purchase by Amazon of the Book Depository. These companies can sell books at a more competitive price in the Australian market than local booksellers. This is because they can buy books at a cheaper wholesale price; pay a low postage rate to Australia; and not required to impose the 10 per cent goods and services tax on books when the total value is under $1,000.

The current exchange rate also favours overseas purchases. The exchange rate, in real terms, is at its highest level since the mid 1970s. Over the year to September 2011, the Australian dollar has appreciated by 15.4 per cent against the US dollar, by 8.3 per cent against the trade-weighted index of currencies, and by 5.2 per cent against the euro. The strong dollar is a challenge for all Australian trade-exposed industries. It has raised the price of the goods that Australian manufacturers sell in overseas markets and intensified competition from cheaper imported goods, including books.

Australian book retailers are disadvantaged by a distribution system that is comparatively slow and inefficient. While book distributors have improved their distribution systems, booksellers continue to have difficulty accessing titles in a timely manner. As consumers now have the choice of accessing titles online, there is a substantial sales leakage overseas. In addition, Australian retailers do not yet have a comprehensive digital distribution system to help
them to compete with their international rivals in the domestic or international markets.

The increasingly competitive environment is also clouded by some commercial uncertainties surrounding the sale, loan, and licensing of ebooks, particularly in relation to the holding of ebooks by libraries. These uncertainties, along with concerns about copyright and piracy (which is potentially much easier to commit in a digital environment), may erode the incomes of authors and publishers. The Book Industry Strategy Group has identified these as issues to be addressed by both industry and government in order to continue to provide incentives to Australian content creators.

In spite of these challenges, the Australian book supply chain has significant strengths on which to build a competitive industry into the future. Among these are the creative capacities of Australia’s writers and illustrators, including a number of who are internationally acclaimed; a healthy and vibrant publishing industry; an efficient book printing sector with the capacity for quick turnaround times; a strong independent book retailing sector; proximity to the growing markets of India and China; an efficient royalty collection system; and the rollout of the National Broadband Network, which will provide the infrastructure necessary for an expansion of ecommerce.

The Book Industry Strategy Group has set the following vision for the Australian book industry:

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