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Amazon Seeks Canadian Distribution Base

In what could prove to be the most significant story of the year for authors, publishers, distributors and retailers of all kinds of books, Amazon, which established a Canadian website in 2002, is now seeking to distribute its books from a Canadian warehouse.

This would appear to infringe on a longstanding Canadian position of “Cultural Sovereignty” designed to protect the book and music industry here.

Furthermore, if the government approves this, it would be somewhat powerless to stop Barnes & Noble, Borders and Books-a-Million from establishing an overt retail presence in this country.

Years ago, when I worked for the company that later became known as The Master’s Collection, Pilgrim Records U.K. had a financial stake in Pilgrim Records Canada, which, when the government became aware of it, forced the company to jettison their British owner or shut down.   International companies trading here have had to establish Canadian identities, such as Random House of Canada or HarperCollins Canada.

Big box stores like Indigo and Chapters exist here because Barnes & Noble can’t travel north of the border; Chapter’s shopping-mall incarnation, Coles Bookstore, means that the company has a virtual monopoly when it comes to book retail chains.   Some have argued that breaking that monopoly would increase competition, but Coles has exclusive lease agreements with every major shopping mall in the nation, and one expects that Indigo or Chapters has negotiated similar security with the developers of big-box- and power-centres.

Today’s Globe and Mail spells out the issues involved in Amazon story: (These are selected paragraphs only in a very thorough and recommended story…)

Canada’s booksellers are urging Ottawa to block Amazon.com from building a distribution network in Canada, raising the stakes in a showdown over government restrictions on foreign control of the cultural industry.

The Canadian Booksellers Association says it wants Heritage Minister James Moore to reject Amazon’s plan to open a new business in Canada, which industry insiders say is aimed at boosting the company’s competitiveness and giving it more control of its book distribution here.

The booksellers association warned the Heritage Minister that allowing Amazon to operate here would contravene the Investment Canada Act, which requires that foreign investments in the book sector be compatible with national cultural policies and “of net benefit to Canada and the Canadian-controlled sector.”

The rising tension between Canadian booksellers and Amazon underlines the paradox in federal policy that allows Amazon to run a virtual business – Amazon.ca – as long as it does not have a physical presence in the country.

For consumers, Amazon’s proposed new business could be a benefit if the e-tailer were to pass on operational savings to customers. The “fulfillment centre” it wants to launch is believed to be part of Amazon’s move to cut costs by moving shipping in-house. Currently, Amazon has a distribution deal with a Canada Post subsidiary.

In regulatory terms, the business is significant. If Canadian Heritage allows Amazon to proceed, critics claim Ottawa will set a dangerous precedent, opening the door to foreign ownership in a Canadian cultural industry.

If Amazon’s proposal is denied, the government will find itself in the difficult position of simultaneously saying Amazon’s business runs counter to Canadian cultural regulations, while allowing Amazon.ca to continue functioning with few restrictions.

Either way, Ottawa’s final decision – coupled with its recent plan to possibly open the Canadian telecommunications sector to more foreign ownership – may herald a fundamental reshaping of Canadian foreign ownership and cultural protection regulation.

Though Canadian rules prevent book retailers from being foreign owned, some foreign companies are key in book retailing. U.S. chains such as Costco Wholesale play a big role in Canadian book merchandising, sidestepping the ownership rules since they aren’t squarely focused on book retailing.

Continue reading here…

Reuters Canada news service also reports on the story:

Efforts to pry open the culturally sensitive Canadian media industry to more foreign ownership took a new turn Monday when Amazon.com sought federal approval to start a new business in Canada.

The application to Heritage Canada, if approved by the Ottawa, would see the U.S. online retailer establish its own fulfillment business here after using Canada Post for product delivery since 2002 to serve a Canadian version of its U.S. website…

…Beyond book-selling, Canada also regulates foreign investment in the phone and broadcasting sectors, both of which face changing foreign ownership rules and landscapes as well. The conservative government last week signaled it would look to open the floodgates to more foreign investment in these areas.

In an earlier story in The Globe and Mail, the same reporters, Omar El Ekkad and Marina Strauss, provided this additional background:

“It’s full of contradictions,” said Carolyn Wood, executive director of the Association of Canadian Publishers. “It does highlight how the meaning of national borders is changing in a digital world.”

Ms. Wood said Amazon.ca is subject to no restrictions. “It is essentially only a domain name,” she said. “There are no offices or warehouses. … They aren’t subject to any restrictions in terms of carrying Canadian content or anything else.”

When Amazon launched the Canadian version of its website in 2002, Canadian Heritage conducted a review of Amazon.ca. Ultimately, however, the department concluded that the Investment Canada Act didn’t apply to the website – thus allowing Amazon to enter the highly regulated Canadian bookselling industry. Canadian retail chain Indigo and the Canadian Booksellers Association (CBA) took the case to court, but to no avail.

The key argument that the Canadian Heritage review rested on was the fact that Amazon had no employees or offices in Canada. It currently has a Canada Post subsidiary handle its shipping in Canada, but that relationship was deemed a contractual relationship.

But the proposed establishment of Amazon Fulfillment Services Canada Inc. changes all that. Even though the new company likely has almost no impact on Amazon.ca’s relationship with Canadian customers or the way the website’s front end operates, it does represent a physical business in Canada – that technicality prompted Canadian Heritage to revisit the 2002 issue.

Additional coverage in The Bookseller here and here.

Meanwhile, Amazon in the U.S. has other problems on its hands today, dealing with the issue of the vast number of websites and blogs that are part of its affiliate program.   These bloggers and online sellers provide additional presence and visibility for the company and sometimes the alternative sites create the illusion of competition, when in fact all Google searches lead back to Amazon.

The issue concerns affiliates in the state of Colorado and the collection of state sales tax on products Amazon ships in from out of state.   Rhode Island and North Carolina also have strict online sales tax laws, and affiliates there had to be cut of as well.   Read more about that issue in this Yahoo News report.

  1. joseph90
    March 9, 2010 at 11:37 am

    Not sure why the fuss. We already are having to compete (barely) with Amazon and their 30% discount.

    I think this is more of an issue for Chapters/Indigo, their monopoly is threatened. Where was all the fuss when the independents were wiped out by their monopoly?

    • paulthinkingoutloud
      March 9, 2010 at 6:29 pm

      If you read all the articles online however, Chapters is laying low on this one. Apparently at one time they wanted to bring in a UK partner and probably want to leave that door open.

  1. April 19, 2010 at 5:37 pm

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