Could Watermark Provide DRM Solution?

Publishers can’t be blamed for trying to safeguard their assets with digital rights management protection on their e-titles, particularly against large-scale file sharing.

The problem is DRM does not really deter anyone determined to share files, which led Dana Robinson, a adjunct professor of law at the University of San Diego School of Law and partner with Techlaw LLP, to propose a solution in an article for Digital Book World. His solution would be to create e-books with a watermark place throughout the book.

The e-book’s buyer would have to provide personal information for the watermark by agreeing to terms and conditions that would prohibit the resale or distribution of the title.

“The point of making a watermark that shows the user’s personal information is to create a disincentive for the user to pass the book along to unknown third parties, deputizing the user to act as a gatekeeper, protecting the book from wrongful distribution,” Robinson wrote, adding that removing the watermark could then be a violation of the Digital Millennium Copyright Act.

Robinson points out that his watermark solution would not prevent people from sharing their book with family or close friends, but that they’ve always done that with printed books. His watermark is aimed at individuals trying to gain financially from someone else’s work.

“What e-book publishers need is a way to distribute e-books with as little hassle as possible, while ensuring that the publisher can sue pirates and stop e-book sales, rental, and large-scale sharing,” he said.

Change is coming to E-Book Market

The Department of Justice recently filed a motion asking that its settlement with Hachette, HarperCollins, and Simon & Schuster in its e-book pricing lawsuit be approved in federal court. No surprise there.

If accepted, sometime around the middle of September, retailers will be able to set their own prices for e-books, at least from the three publishers in the settlement.  The settlement allows the agency-pricing model that came under DOJ scrutiny to remain, but the provisions of the settlement make anything resembling the current agency model highly unlikely.

While the settlement allows retailers to set the sales prices, publishers can prohibit discounts on their books. That provision comes into play when the total sales of a year exceed the margin the retailer has earned, according to an analysis of the agreement in The Shatzkin Files.

However, the article also points out how easily that discount prohibition may be sidestepped. For instance, a retailer such as Amazon may choose to cut e-book prices way below its costs during a specific time frame, such as the upcoming holiday season, figuring to make up the margin over the next nine months. In the meantime, other publishers who may still be clinging to the agency-pricing model may have to lower its prices just to stay competitive.

Which is exactly what many in the bookselling industry feared all along.

Cengage Places Bid to Buy McGraw-Hill Education

Last month, Standard & Poor’s reported that Cengage Learning’s cash flow was “less than adequate” to cover its needs over the next 12 to 18 months. Last week, reports surfaced that Cengage made a bid to purchase McGraw-Hill Education (MHE). So what gives?

As it turns out, buying MHE could be a way for Cengage to increase its revenue, according to the report. The S&P report about Cengage’s cash flow was based on an assumption that future refinancing costs would be too high, with the Reuters article adding that “may be driving Cengage and its private equity owners to consider acquisitions that would boost its cash flow.”

“It wouldn’t be appropriate for us to comment on what McGraw-Hill might or might not do with respect to a sale or spin-off of its education business,” said Cengage CEO Ron Dunn in the Reuters story. “With regards to Cengage Learning, we continue to generate strong cash flows from operations and we are very confident that we can service our debt while continuing to fund our business at appropriate levels as we lead the migration to digital solutions in all our markets.”

Cengage isn’t alone in its interest in MHE. Reuters reports that Bain Capital, Thomas H. Lee Partners, and Apollo Global Management have also placed bids for the firm that could be valued at around $3 billion, according to The Bookseller. Reuters also reports Cengage is looking to make a bid for EmbanetCompass, an online education services company.

McGraw-Hill decided last September to split into two publicly traded companies by the end of 2012 after calls from minority shareholders to restructure the business. MHE earned $2.3 billion in revenues and had an operating income of $260 million last year. Digital-related solutions accounted for more than 20% of its 2011 revenue

As in any business venture, there are risks for Cengage, particularly if its cash flow declines. Consolidating that much debt into one company could also be a concern for the industry, but the potential for reduced store-channel leverage and more direct-to-customer and institutional sales models are also long-term concerns stemming from more consolidated content.

Or the bid could provide Cengage with some breathing room.