Harry Potter and the all-too-rare windfall

Jul 18th 2005
From The Economist Global Agenda

The latest volume in the Harry Potter series is set to break all publishing records, to the delight of booksellers. The success of the Potter books has also made its author vastly wealthy and provided a windfall for its publisher. But it is an oddity in an industry that is growing slowly and rarely sees bumper profits

THERE is no doubting the magical powers possessed by Harry Potter. The sixth instalment of the boy wizard’s adventures, “Harry Potter and the Half-Blood Prince”, broke publishing records and outstripped sales of the previous record-holder—the fifth adventure featuring Harry and his chums. The numbers associated with the new volume are likely to strike publishing executives with a feeling of wonder and awe not dissimilar to that felt by its young (and not so young) readers. In America, 6.9m copies were sold in the first 24 hours after publication on Saturday July 16th. Scholastic, the book’s American publisher, has set a print run of 10.8m, almost equivalent to the total sales in the country so far for volume five. Bloomsbury, the British publisher, said 2m copies had been sold in Britain, some 13% more sales than the previous Harry Potter book registered on its publication day.

The Harry Potter series is a publishing phenomenon by any measure. All told, around 270m Harry Potter books have been sold worldwide. But this type of blockbuster is hardly the norm for publishers that generally struggle to earn decent profits in a business that offers only low growth and slender profit margins. Worse still, the “long lunches” that publishing executives famously enjoyed are on the wane. The days when the business was still regarded as a pursuit for gentlemen keen to nurture artistic achievement almost without regard for the vulgar pursuit of revenue are all but gone.

J.K. Rowling, author of the Harry Potter series, deserves praise for enticing children to read books rather than play video games or watch television all day. But despite her success and that of a few other recent bestsellers, such as Dan Brown’s “The Da Vinci Code”, the world market for books has grown only slowly in recent years. According to PricewaterhouseCoopers, a consultancy, global book sales in 2004 increased by 1.5% over the year before, to $107 billion. The slightly higher growth rate of 3.1% projected for 2005 (see chart) is in part because of the arrival of a new Harry Potter title and an expected growth in textbook sales as a result of George Bush’s “No child left behind” educational legislation.

Bloomsbury is something of an oddity in an industry that has seen many of the world’s leading publishers become part of global media conglomerates—witness Viacom’s tie-up with Simon & Schuster or News Corporation’s with HarperCollins. The company was formed nearly 20 years ago by publishing executives who saw that the industry was changing but still reckoned there was room for a small publishing house run along more traditional lines. But all publishers, big and small, have to face the fact that the real power in their industry belongs to others. Retailers have grown rapidly through mergers in recent years and now bookselling is dominated by huge chains, such as Barnes & Noble in America, Waterstones in Britain, Amazon and others online, and supermarkets selling heavily discounted bestsellers. The upshot is that the balance of power has tipped to retailers, whose demands for ever-greater discounts have squeezed publishers’ profits.

At the same time, bestselling authors and rapacious agents have demanded and got ever-larger advances for their wares. These sums are sometimes paid years before delivery of a book. The fad for celebrities from other fields penning works has worsened this trend while attracting accusations that the industry is dumbing down. Random House, an arm of Germany’s Bertelsmann, recently reached a settlement with Sean “P. Diddy” Combs, a rap musician and clothes designer whose talents clearly didn’t stretch to literature, over an advance paid in 1998 for a book that he failed to deliver. An additional oddity of the industry that hampers publishing houses is a returns policy that obliges them to take back any unsold books—some 34% of hardbacks in America in 2003, according to one estimate.

It is these threats that have driven many publishing firms into the arms of media giants with deep pockets. The era of the patrician, tweed-suited publisher has given way to one of cost-cutting and job losses in a quest for efficiency and decent profits. At the same time, the business has come to rely ever more heavily on a small number of huge-selling blockbusters. Publishers lose money on most titles they produce. In America, an astonishing 195,000 new books were published in 2004 (14% more than the previous year) but the big publishers concentrate most of their marketing resources on a few books that they hope will provide returns big enough to pay for all the failures. But gambling so heavily on a small number of titles carries the risk that too few will succeed to repay the hefty outlay. Hence publishing is unlikely ever to be a fast-growing business.

Though today’s media giants are more profit-oriented than the publishing bosses of the past, they too regard the business as one with a cachet and prestige that has a value beyond the bottom line. That said, a difficult year in 2004 at Penguin, owned by Pearson, a British media giant that also owns 50% of The Economist, led to speculation that the publishing house which invented the cheap paperback might be put up for sale. Profits were hit by a sharp decline in mass-market paperback sales in America, on which Penguin relies more heavily than its rivals. Pearson later said that it would not sell Penguin. Viacom is thought to be keen to sell Simon & Schuster if it receives a reasonable offer.

Bloomsbury, like bigger publishers, regards the cash from Harry Potter as a windfall that can finance its more risky undertakings. But the Potter tale also highlights another drawback for publishers: they do not get to share in the spin-off success of a product they may have championed from an early stage. Publishers usually do not retain the rights to lucrative TV, film or merchandising deals for their books. Bloomsbury, which took on Ms Rowling’s work only after several other publishers had turned her away, made a respectable pre-tax profit of £16m ($29m) last year. But it can only look forward to one more Potter tome to boost its coffers—the author has insisted that the story will end with the next book. Despite selling Harry Potter’s film rights cheaply to Warner Brothers in 1998, a cut of merchandising deals and the direct income from her books has made Ms Rowling vastly wealthy, with a fortune estimated at £500m.
Magic for Ms Rowling, but for Bloomsbury the spell may soon be broken.

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