Banned Bookseller Week

The New York Times recently reported on international backlash from AbeBooks vendors as the company sought to limit its operations by jettisoning sellers in a range of countries including South Korea, Hungary, the Czech Republic and Russia. AbeBooks provided justification that the closure of a third-party payment provider would limit the ability of the company to provide service to a number of countries. The impact on such booksellers cannot be understated, with small businesses frequently relying on AbeBooks as their only online presence. The impact on such dealers could be fatal to businesses, however this decision may shed light on the operating environment of the world’s largest online marketplace devoted to scarce printed matter.

The Impact on Amazon

Acquired in 2008 by Amazon, AbeBooks has filled a much needed void in the rare book industry: an online marketplace connecting buyers with sellers at a cost significantly undercutting the creation and maintenance of standalone online stores. AbeBooks has capitalised on the fractured, diverse nature of the rare book trade and has brought together dealers and customers with the sole focus of trade in secondhand and rare books. In pursuit of offering the widest possible selection of book purchasing avenues, the site was acquired by behemoth Amazon. The acquisition by Amazon left AbeBooks as an independent subsidiary, with minimal impact on the structure of AbeBooks itself. At the time of the acquisition some outlets speculated on the prospect of growth in AbeBooks as part of Amazon’s extended online offerings, with concern over the level of integration that would be achieved by Amazon. The impact on the share price of Amazon, however is largely unremarkable. Chart 1 shows the announcement of the AbeBooks purchase, highlighted in red, and the minimal impact on share price. In context of the broader year, the share price change is essentially negligible when considering returns. This proves expected, given the comparative sizes of the companies at takeover, in addition to the high level of similarity between the business offerings of the two companies.

Amazon1

Chart 1

Gaining a picture of the impact of the AbeBooks decision on Amazon, however, proves untenable. In the midst of criticism regarding free delivery over the Christmas period, breakdowns in Saudi relations, and potential anti-trust investigations, recent declines in Amazon share price can hardly be analysed for the exclusive impact of the AbeBooks announcement on the company overall. It should, however, be said that in light of these concurrent events few investors would be particularly interested in the loss of revenue of  small subsidiary. Ultimately, the impact of AbeBooks’ decision hardly impacts on Amazon: loss of revenue would be negligible, and reputational damage insignificant. In conjunction with the stated operational independence of AbeBooks, it can be surmised that decision making hinges more so on financial performance than integration.

Operational Challenges

The suggestion that the closure of a third-party payment service necessitates shuttering business operations in numerous countries presents a curious justification. The proliferation of online payment services would suggest transition to an alternative would be viable, and given the impact on customers and dealers, vital. With much of AbeBooks service infrastructure aging rapidly, capital expenditure on such operational services is becoming less a luxury and more a necessity. Public information regarding AbeBooks position within the Amazon conglomerate are scarce, as the site operates as a non-core outlet of the book division, an area which is becoming less essential to the firm’s profits. In light of the acknowledged (and treasured) network benefits that pervade the book trade the decision to unilaterally discontinue business relationships in potentially profitable developing markets proves peculiar, unless significant capital expenditure limitations are assumed.

But will Amazon listen?

The impact of over 450 rare book dealers publicly denouncing AbeBooks, whilst monumental in the site’s history, is unlikely to be keeping Jeff Bezos awake at night. In assistance of the booksellers cause, however, is the distance between Amazon and AbeBooks. Such independence can see pressure directed towards AbeBooks to affect change, rather than the vast corporate machinery of Amazon. Such an operational difficulty would cut to the core of AbeBooks infrastructure, however for a corporation such as Amazon, this may only represent an annoyance. The significant hindrance, however, is the cost associated with transition in line with AbeBooks existing terms and conditions. The continuation of the marketplace will rely on a sympathetic transition to alternative payment providers, an area which dealers may have influence.

The niche trade of the rare book world survives in significant measure to collegiality and cooperation between dealers in order to achieve economies of scale reducing costs, and drawing attention. Investing to continue vendor relationships is necessary for any online marketplace, particularly in such an interconnected sector.  It should be conceded that any business in a seeming contraction must make difficult decisions at the expense of its customer base, however as the leading online marketplace for rare books with an increasing pool of payment service providers the decision remains puzzling.  With dealers protesting in droves via #bannedbooksellersweek, pulling books from AbeBooks and competitor Biblio leaping upon the opportunity, AbeBooks may seen this decision as a series misstep in a tight knot community. Such a decision provides a significant mark against AbeBooks commitment to the rare book trade, and one which is unlikely to be immediately forgotten.

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When good books go bad

Like any secondhand good, trade in antiques presents challenges in authentication of item ownership in the market. Items considered antiques can have long and vibrant histories, turning an item from a utilitarian or decorative object into history or culture made manifest. Even in a world where provenance is king, issues can appear and result in challenges for dealers and collectors. Examples traverse the antique sector, from monumental transnational disputes, to attempts at modern rectification of historical injustices and frequently capture the public gaze. These instances, whilst very rare, stand out as significant risks for antique collectors and dealers.

The world of antiquarian books is not exempt from such occurrences, as shown by the recent legal dispute regarding books allegedly stolen from Pittsburgh’s Carnegie Library These books, handled by leading London dealers Maggs Bros and Peter Harrington, have since be recouped and repatriated. This article will look at the deaccession process and its downfalls, as well as review the risks for dealers and their clients.

 

The deaccession trap

Public institutions and libraries are repositories for local history as well as broader society and humanity. Stories, art, knowledge, and craft are held as a public good, usually in pursuit of predetermined objectives. As collections grow it may be necessary to refocus the collection, and place unappreciated items into the market through a deaccessionment. Most typically due to practical or financial constraints, items may be sold to shrink the collection, however stingent processes for deaccessionment have only recently been broadly adopted (Miller, 2018).

Library’s are unique institutions to galleries or museums, as they frequently serve a lending purpose to the general public. From the early chained bindings of continental Europe, the issue of book theft has plagued lending libraries leading to a number of measures. The vast majority of books removed from a library frequently hold little value in and of themselves. Rare book collections, however, rarely circulate to the general public, and the theft or misappropriation of such cultural artifacts is not uncommon.

Withdrawn

Example of library deaccessionment stamp

As the American Library Association notes, libraries processes have become increasingly complex and sophisticated, however this doesn’t immediately imply accuracy and completeness. Digitization of library catalogues provide a useful opportunity for libraries to maintain real time records, however for materials either not catalogued, removed prior to digitisation, problems persist. The traditional signs of deaccessionment, stamps, (both ink and in blind) may be removed or applied incorrectly. Similarly, internal or external malfeasance may result in theft or significant damage in pursuit of financial benefit. The need for increased protection of culturally and commercially valuable items held by public institutions continues to challenge libraries. Early ad-hoc deaccessionment processes coupled with limited scope for regular collection audits see vulnerability in a system that can place both dealers and purchasers at risk.

 

The risk to dealers

Beyond criminal proceedings of those directly involved in theft of articles from institutions, reputational damage to individual dealers and the wide trade stand as the greatest risk when dealing with such items. Notorious thefts from the Girolamini Library and the Swedish Royal Library drew significant media attention, with inferences of complicity leveled against dealers. Dubious business practices erode trust in the antique dealing community, as well as individual dealers, however a risk assessment must be made by dealers before engaging with such books.

The least burdensome approach is to refuse to deal in any material bearing library marks. Such stock would rarely constitute the majority of a dealer’s stock, and would most likely only represent a margin loss of profit margin. Choosing to deal with stock that bears library marks represents a challenge for dealers as libraries rarely maintained standard deaccessionment markings, nor adequately available records to verify proper process. Contacting institutions is a viable option, however given the contentious nature of deaccessionment coupled with lack of recordkeeping, this does not provide a panacea. Given the limitations presented, dealers may seek to limit their reputational exposure at purchase as well as sale. The maintenance of sale and purchase documentation is essential, and would prove critical to authorities should issues arise. Retention of catalogue listings, demonstrating the degree of care given to research and noting conditional factors and library markings is also essential. The International League of Antiquarian Booksellers’ database of stolen books is a useful (but limited) source for further investigation of suspect items. Finally, as exemplified by the actions taken by Maggs and Peter Harrington, shouldering the burden of restitution highlights the integrity of the dealer and their commitment to the wider trade, as well as avoiding gain benefit from the proceeds of crime.

 

The risk to collectors

Most collectors would gloss over the possibility of a purchased book being illegaly removed from a collection. It is worth considering, however, as a collector’s library grows. Even though a piece may be purchased bona fide, circumstances may see the piece seized for evidence or possibly even repatriated dependent on jurisdiction. Such extreme outcomes as tremendously rare, however may place the collector in a position of significant financial loss.

Some actions to be taken to prevent unforeseen restitution of unique pieces include:

  • Understand your rights. To prevent unscrupulous dealings taking advantage of unknowing customers many governments have introduced consumer protection laws. Regulator and legislation such as the UK Consumer Rights ActAustralian Consumer Law, the Canadian Office of Consumer Affairs, European Union member states take varying approaches but consumers are typically protected to some extent from unfair trading practices.
  • Work with reputable dealers. Whilst even the best dealers can make mistakes, or lack complete knowledge about an item, the firm’s standing in the collecting community can provide valuable comfort to purchasers. Trade organisations such as CINOA, ILAB, and national bodies maintain codes of conduct which bind members to act with integrity, and frequently provide
  • Understand terms of trade. Like any contract, terms of a transaction can be both explicit and implicit. Dealers will of include terms of trade on their invoice, or usually on their website, which frequently include guarantees and return conditions.  Consumer protection terms may also be implied via statute or by law, however the guarantees made by a dealer should be explicit at time of purchase

 

This article does not constitute legal advice

Keynes over time.

We are, as I have said, one equation short.

– The General Theory of Employment, Interest and Money. Book 5, Appendix to Chapter 19, p. 276

As with the art market, the rare book market faces distinct challenges from other asset classes. The heterogeneity of works disallows creation of any useful market index; illiquidity sees distortions to any underlying price; and lack of central exchanges and significant private dealings preclude accurate price research. These observations are almost unhelpfully economic to a dealer – they have to make do with the information that’s available. This article will look at one of the seminal publications of economics, Keynes’ The General Theory of Employment, Interest and Money, and look at its historical prices over the last 10 years as well as its availability in the market today.

 

The General Theory

Considered his magnum opus, The General Theory of Employment, Interest and Money cemented John Maynard Keynes (1833-1946) as one of economics’ leading luminaries. Revolutionising macroeconomics, The General Theory birthed Keynesian economics, arguing in favour of government interventionism, and questioning the basis of free market economics. Wide-reaching in its impact and application, The General Theory has been recognised in Muir’s Printing and the Mind of Man.

An unassuming book, The General Theory remains popular with collectors, and as such appears in the market not infrequently. It can be regarded as a quintessential modern first edition, where condition and ownership history are key. Minute differences in condition can dramatically affect price, and every piece is unique. Whilst preclusive to deterministic pricing, The General Theory appears frequently enough in the market that comparisons may be drawn. Furthermore, as an established economist and author at time of publication, first editions Keynes’ General Theory maintain reasonable levels of conditionally similarity as the pieces were typically respected from their creation.

 

At auction

Auction results form the most readily available records on which a market price can be based. The below shows a sample of 61 historical sales from 1998 to 2017. Prices have been adjusted to values equivalent to the 2017 British Pound.

Keynes Auction Histogram

Keynes auction results over time

As one would expect, The General Theory appeared in the British market significantly more often than in the US market, however realised prices are on average 25% higher in the British market.

These records form the starting point for most pricing exercises, as they represent a realised transaction, setting a market price for the individual piece. They do, however, carry significant limitations. As generalist, high-turnover organisations auction houses catalogues typically have limited information, particularly regarding condition. Similarly, whilst the above has been RPI adjusted, auctions are intrinsically representative of the economic climate in which it is based. The limited sample set does provide for rigorous decomposition of these effects, nor establishment of an underlying deterministic pricing model.

 

For private sale

Broadening the scope of available observations, a sample of 33 dealer-offered copies was compiled, and presented below.

Keynes Retail Histogram

Whilst compellingly similar to the distribution of auction results, significant limitations exist with comparison of dealer prices with auction results. At a fundamental level auction results represent completed transactions, with prices reflective actual demand in the market. Dealer prices, however, cannot be viewed as independent and true reflections of the market. Auction records form the basis of retail pricing, as forming cost price or as a logical basis for valuation. Object idiosyncrasies, commercial margins, and ancillary expenses provide ample opportunity for discrepancy.

It is arguable that relationship between auction results and retail price setting is not one-way. Auction estimates play an important framing effect on bidders (Goeree, Offerman, 2003). Valuers will seek to apply an estimate designed to promote sale, in competition with existing retailers and in context of past public results.

 

The General Theory of pricing

Pricing idiosyncratic assets such as books, artwork, or antiques has been suggested as more an art than science. The romanticism associated with such a phrase belies the underlying pricing difficulties in a market riddled with feedback loops. It is true that any attempt to statistically decompose a deterministic price model would encounter layers of statistical simultaneity. However, the iterative, ad-hoc methodology practiced in industry appears less epistemically pleasing when interrogated at the individual player level. An informative framework can be developed when pricing decisions are considered in the context of decisions made under uncertainty.

As players in the market update their pricing expectations, a standard economic model would contend that some notional equilibrium would be reached. Implicit to this is the assumption of a wide and unceasing demand. Such a niche market, deeply affected by whims of individual collectors, can see demand shrink or disappear with unknowable speed. Dealer’s have summarised this capriciousness with the adage that their ‘stock is only worth as much as someone is willing to pay’. With this in consideration, advertised prices can be considered a the dealer placing a bet on their likelihood of sale (in the sense of Annie Duke’s Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts).

The General Theory sought to relax assumptions made by classical economists in order to provide an alternative framework through which to view political economy. As a collectible, it provides a useful case study to review the antiquarian book market. Far from a theoretically perfect market, antique pricing and valuation stands as a subjective and mercurial process steeped in uncertainty. When unchallenged, the antique industry can appear to be built on valuation through near mystical divination, as presented in some popular television series. In a similar vein, a cottage industry of enthusiasts produce a variety of pseudo-deterministic models to provide persuasive price guides premised on some supposed intrinsic worth. Inherent to these divergent approaches is the presence of uncertainty.

Transitioning to an uncertainty driven framework for valuation allows a clearer perspective on the incorporation of information in pricing, as well as the incentives of market players. Compared to more homogeneous and efficient markets, the structure of the antique market sees uncertainty play a nuanced role, for which dealers and buyers must account for when making purchasing decisions. Criticism may be leveled against such a framework as it does not provide an explicit model for profit derivation, and comparatively limits the impact of skill and knowledge. Relaxing assumptions of certainty may seem rudimentary to some readers, however it is valuable given the proclivity of buyers to rely on antiques as a store of value. As Keynes noted:

It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain

– The General Theory of Employment, Interest and Money. Book 4, Appendix to Chapter 2, Section 2, p. 148

 

 


Analysis Limitations

  • Auction records are not consistently reported as inclusive or exclusive of premiums.
  • Auction records are limited in granularity to the year. As such, yearly average exchange rates have been used at 4% above the interbank rate (the typical cash exchange rate). Sourced from OANDA.
  • Retail prices were converted to British pounds at the prevailing rate, however dealers frequently maintain items listed in multiple currencies, or across different platforms resulting in different prices.

References

Goeree, J. K. and Offerman, T. (2003), Competitive Bidding in Auctions with Private and Common Values. The Economic Journal, 113: 598-613. doi:10.1111/1468-0297.t01-1-00142

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The People’s Bank

Today, the Australian Greens announced a desire for the Reserve Bank of Australia (RBA) to originate home loans to increase the rate of home ownership in Australia. The Greens’ proposal seeks to allow up to 60% of a home’s value to be borrowed at low rates, capped at AUD $500,000.  This article will look to some of the questions raised by such a proposal in the context of the modern banking environment.

Déjà vu

Without historical context this proposal could either appear as a blindly obvious initiative, perplexing as to why it’s never occurred before. As with much in life, however, it has. Australia’s largest bank by assets, the Commonwealth Bank of Australia, started with this exact purpose in the early twentieth century. Originally operating as commercial bank, it quickly evolved to serve Australia’s need for a central bank. This dichotomous entity was found wanting, and legislation was soon passed creating two entities: the Commonwealth Bank of Australia, acting any modern commercial bank ; and the Reserve Bank of Australia, taking on the mantle of central bank.

A king’s castle

Home-ownership remains a quintessential piece of Australian identity, from our infatuation with a backyard barbeque, to its influence in modern Australian cinema. To combat the continued decline in home ownership, residential mortgages would be brought back into the realms of government of service provision. The inclusion of home loan lending within the purview of the RBA would see a dramatic change in its current operations. In it’s purest form the Reserve Bank of Australia acts in concert with government to provide stability to the Australian currency, pursue full employment, and foster economic prosperity for Australia (s.8, Part II, Reserve Bank Act 1959). It has a variety of tools at it’s disposal, including the ability to take deposits and lend. In the modern Australian economy it most relevantly plays a vital role in monetary policy implementation through the setting of policy rates and control of the Australian Payments System.

The lending problem

Beyond cosmetic arguments regarding the lack of RBA retail lending infrastructure, the introduction of home loan lending to the central bank raises interesting questions.

To engage in such a scale of lending, any lender must expect some instances of default, regardless of how stringent screening procedures may be. The proposal relies on the private market to provide the remaining loan funds, but how would these interact? Should the government maintain first lien over property, the cost of private funds would dramatically increase given the increased likelihood a private lender takes a haircut in event of a default. Any net increase in the aggregate interest rate can be seen as ineffective policy, as funds become more expensive to access. With increased regulatory capital costs and risk management associated with the standardised approach to capital adequacy, it is hard to see the Greens’ proposal on aggregate being more affordable.

Even in the wake of the Global Financial Crisis, the securitisation of loans in Australia forms a asset management technique for retail banks. As of 2017, AUD denominated residential mortgage-backed securities have returned to pre-GFC levels. But would the RBA seek to make use of the Australian loan securitisation markets, or would the loans be kept on Government books until amortisaton? Should these assets be sold into the RMBS market, they are most likely to be very desirable to institutional investors, such as superannuation funds. This may then cause the higher-risk commercial bank RMBSs to be less desirable and less profitable, putting further upwards pressure on commercial bank interest rates. This process would seem at odds with the intentions of the proposed initiative, but hypothetical retention of mortgages by the RBA brings the question of risk to the fore.

The risk problem

If it is accepted that the loans are not on-sold, the RBA would place itself in an interesting situation. The accumulation of long-lived, illiquid, and risky assets has long been an issue for banks to manage. Whether an implicit government guarantee of solvency exists regarding the RBA proposal is an open question. Should a shock occur to the Australian economy, RBA held loans could prove a useful additional monetary policy tool: the direct control on the economy through interest rate manipulation may prove a boon. Of a same token, however, it may double-down the volatility of the system. Reduced rates are rarely immediately passed on by commercial banks. Should the RBA decrease the target cash rate, in addition to the RBA home loan rate, the likelihood of commercial bank rates following suit would decrease as economic outlooks worsen. The impact of such a dramatic change to the RBA’s monetary policy tools is particularly uncertain.

The interaction of such a bank with international and domestic regulation provides a challenging area for such a proposal to overcome. It is unclear as to whether a home loan originating RBA would be subject to capital adequacy requirements under the Basel Accords. Given the proximity of the RBA to the Government, would capital be considered the holdings of the Australian Government deposited with the RBA? Would capital not be required due to an implicit or explicit government guarantee? The questions of the banks standing in the regulatory sphere become murkier and murkier, as the parameters of the Greens’ proposal are increasing indistinct.

Reserve and Residential Bank of Australia

Housing affordability continues to be one of the biggest economic questions facing contemporary Australia. Innovative policy is required, and courageous ideas sought but that doesn’t allow for relaxed rigour. The modern banking environment has moved well beyond the formative days of the Australian economy, and the worth of an independent, focussed Central Bank should not be underestimated. As with any significant proposed departure from the economic status quo, many questions still beg for answers. Many of the questions of the Greens’ proposal cannot be answered without a firm position on one : How much of a commercial bank do you want the RBA to be?

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Books, Antiquities, and the EU

The recent announcement of regulation to import of cultural artifacts to the European Union will have material impacts on all branches of the antique industry. Taking the AIM listed Scholium Group (AIM: SCHO) as a case study, this article aims to survey the impact of this regulation on the rare book industry.

Books on AIM

Scholium Group is a curiosity on any listed market: a rare book and art dealing company, operating and exhibiting internationally. The firm specialises in luxury goods with limited and variable supply, in a market highly dependent economic stability and changing customer preferences. Listed originally at 100p per share, Scholium has found a reasonably consistent equilibrium between 45p and 55p (Chart 1). Operating predominantly through Shapero Rare Books, Scholium predominantly faces risk in the illiquidity of rare books and art as an asset class, and significant key person risk due to the highly specialised knowledge required for commercial success in this industry. Given its international focus, Scholium was affected directly by the 2016 UK referendum, as shown by a realised loss in 2016. The firm returned to profit in 2017 as markets stabilised, however the volatility of international markets and regulatory uncertainty may materially impact the firm’s future earnings capacity.

Chart 1: SCHO Share Price from 2014 to 2018

SCHO Chart 1

EU and the Import of Cultural Goods

The recent proposition of EU cultural goods import legislation proves to be a contentious issue in the antiquarian book community. Framed in the context of the worthy aim of limiting transnational terrorist financing, the proposed legislation affects the import of items over the age of 250 years into the European Union. The argument has been made asserting the clumsiness of the legislation when confronting practical issues of international antique and fine art trade, but nonetheless this legislation will significantly affect trade in antiquarian books.

As AIM’s only listed rare book trader Scholium Group stands to be particularly affected by the legislation, even if the implications haven’t been priced into the thinly traded share’s price. With the usual limited financial information available of an AIM-listed company, the impact of the EU proposal on Scholium can be drawn from the recent TEFAF catalogue of Scholium’s subsidiary, Shapero Rare Books.

Should a clean Brexit occur, books and art imported from the United Kingdom or the United States would be subject to the rigorous import standards of the EU proposal. Shapero will be exhibiting €622,500 worth of articles more than 250 years old at TEFAF, all of which originate from nations party to the European Union. That, however, does not exempt the articles from requiring documentation to support their legal export from the country of creation, or source country.

The import of these goods, however, carries a significant level of risk in that member states of the EU will be empowered to retain items for a maximum of six months whilst customs investigates any concerns regarding documentation. Scholium’s explicit reliance on European fairs (see Annual Report & Financial Statements, Year Ended 31 March 2017) highlights the vulnerability of the firm in this area. This vulnerability combined the potential for customs enforced asset lock-ups may see material effects on the firm’s cash flows.

The EU’s effect on the market

The transaction of cultural items and recognition of ownership is subject to numerous international agreement. The introduction of EU legislation on imports, with focus on documentation from items’ source country, could see significant issues for numerous dealers, especially Scholium. As interest in antique material from China and Russia grows additional resources will be devoted to liaising with relevant authorities to secure evidentiary paperwork for materials entering the European Union.  Whilst numerous cases of restitution and repatriation occurred in 2017, EU legislation may not increase the just return of cultural artifacts. Investigator scope and powers received a boost, but this may see dealers reposition their holdings to less contentious stock.

Provenance of publications and printed matter with such long lifespans will prove a challenging question. By nature, books and prints are replicated and rarely can an individual piece’s history be tracked precisely. The possible diversion of dealers’ attention from items falling within EU legislation may see liquidity shift from this subsection of the rare book market, affecting realisable prices. In the long run, this may prove a boon to the UK market, however. Dependent on the degree of equivalence between UK and EU regulation, such antique items may find new homes in the UK, with import and sale less burdened by regulation.

As with much of the UK market, however, the ambiguity of Brexit legislation proves a challenge for Scholium and the UK rare book market.