Christmas came early for British publishers last year, or so it seemed. Santa, dressed as the Office of Fair Trading, brought the gift for which they had all been praying. It referred HMV's £100-million bid for Ottakar's bookstore chain to the Competition Commission.
The OFT's decision, announced in the first week of December, may prove a temporary blessing. But it halts any acquisition long enough for the Commission to ponder its likely effect on competition. Publishers have been pondering that, too, and they don't much like the prospect.
Their concerns say a lot about the looking-glass world they now inhabit, a world in which the people who sell the books wield more power over pricing and product (as they like to call it) than the people who produce them. To complicate matters, HMV itself is now a bid target, and Tim Waterstone, Waterstones' founder, is attempting once again to buy back his old company. This has done nothing to reduce uncertainties surrounding the industry's future.
This swing in the balance of power from publisher to retailer has been accompanied by other unlikely swellings and inversions—not all of them bad. More books are being sold than ever before, with total volumes rising nearly 6%, to 216 million, in 2005. The hardcover has staged an extraordinary comeback.
But Christmas sales, always important, now have an ominously large influence on profitability, as do Top 10 rankings, based on Nielsen BookScan rankings. In 2005, the Top 10 accounted for 50% of all hardcover and trade paperback sales and 35% of all mass market paperbacks, says one publisher who has filleted the BookScan figures. Advances, when a Top 10 candidate is scented, have risen accordingly.
One of the brighter developments is the hint of a less combative relationship between publishers and authors, in the face of common adversity. But what unites them is the single most troubling feature of this new landscape: ever-deeper discounts. And if anyone thought that discounting couldn't get any worse, well, it did, over the recent Christmas season.
"The retailers are bigger than any individual publisher, and they use that power to force prices down," says Gail Rebuck, chairman and CEO of Random House. "But it has gone too far. The discounting this Christmas had a sinister feel about it for the future. I don't quite know where it's going, but it's destructive to the worth and value of the book. We give the highest discounts in the world, and we can't afford any more."
What has been going on? Well, a free market in books, actually. It began around 1995, when the Net Book Agreement, which fixed retail selling prices, started to collapse. Some publishers, though by no means all, thought that the business model made sense—publish fewer titles and sell more of them, allowing retailers to use price as a lever. But the discounts were too high to begin with, and price has spun out of publishers' control.
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The British Marketplace
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There are four prominent U.K. booksellers. The largest and oldest is WH Smith, a 542-branch chain of emporia selling stationery, magazines, books and other paraphernalia. Many of its outlets stock only a limited range of books, but it sells 40 million of them a year. The key player on the high street is Waterstones, of which more later. Waterstones is a range bookseller (one that stocks a deep range of titles) with 194 outlets, owned by music retailer HMV.
Ottakar's, another range stockist, has 140-odd stores, often in smaller towns. Many shoppers think their local Ottakar's branch is an independent—they have that feel about them. Indeed, Tim Godfray, the Booksellers Association's chief executive, reckons that independents see Ottakar's as their main threat for that reason. These were joined in 1997 by Borders, which almost certainly wouldn't have bothered had the NBA still been around. It has 36 superstores and another 33 smaller locations.
Crucially, the new dispensation encouraged big supermarket chains to enter the fray, selling a relatively narrow selection of deep-discounted bestsellers. "And when Tesco [the largest supermarket] gets behind a book, it flies," says Malcolm Edwards, deputy CEO and publisher, Orion Publishing Group. "If a book is in the top 10, it sells in enormous quantities. This is the 80:20 rule with a vengeance."
Today, supermarkets control an estimated 8%—9% of the total market, and perhaps 40% of the top 10. The total number of bookselling outlets has actually increased by 18% since 1995, mostly through the addition of supermarket branches.
Internet sales—Amazon, take a bow—have grown to account for up to 10% of the market. Market researcher Mintel recently claimed that 22% of U.K. consumers bought a book online between June 2004 and June 2005. One publisher with a transatlantic presence says that the Internet's share of the U.K. market is larger than that in the U.S.
The growth of supermarkets and the Internet is putting the squeeze on high street retailers. Spare a thought, too, for the wholesalers, mediating between the rapacious and the unwilling. Trading terms continue to tighten ahead of any gain in margin from the publishers, is how Bob Jackson, commercial director of the U.K.'s biggest wholesalers, Gardners Books, puts it. "We spend a lot of time and effort trying to drive down efficiencies, working in partnership with publishers, carriers and everybody else," says Jackson. "This year will be just as challenging. I can't see it changing."
When it comes to pressure on the high street, the curious structure of the U.K. market is partly to blame. Sandwiched between the mass-marketing supermarkets and the range booksellers, WH Smith occupies a middle ground with no U.S. parallel. It competes with the supermarkets, and the specialists compete with it. The result is a mass-market pull that starts in the supermarket but is felt all the way through to the high street.
Waterstones has responded to that pull by changing its strategy. It has answered the call of the mass market and centralized most of its book purchasing. That has effectively collapsed a diversity of taste at the branch purchasing level into the opinions of one man— its chief book buyer. It has also demotivated branch staff, and some of the more knowledgeable have moved on.
Price has overtaken service as a source of competitive advantage at Waterstones, critics say. Hand-in-hand with that has been a growing concentration on the frontlist; what one publisher describes as "utter indifference" to the backlist; and a reduction in range.
Certainly, the store environment has evolved. The front of the shop is crammed with "3 for the price of 2" titles, and bestsellers. Any publishers who want a place in this "buy me" reception line must pay for the privilege.
"In U.S. bookshops, you get a holistic experience walking around the store," points out Random House's Rebuck. "That's the way our bookshops used to be. But here you're now hard-pressed to want to go past the front door."
What Waterstones does, Ottakar's feels obliged to do, too, though usually to lesser extremes. Price competition is a game that the high street retailers are not well-placed to win, given the sheer size of supermarket and Internet operators. "The Internet has grabbed 10%—12% of the market, and the supermarkets have massively grown their share," says Larry Finlay, managing director of Transworld. "And unless you believe that the book universe has expanded through these new channels—which I don't—that share is coming out of the retailers.' And I don't think they'll ever get it back."
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Shrinking Margins
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"Us and them" used to mean "my" publishing house versus all the other houses, but increasingly it describes a growing alienation between publishers and the big retailers and yet another chill—amongst retailers themselves, caught in the discounting war.
No publisher in their right mind would publicly describe this relationship as hostile, but among large publishers there is a growing sense of community in the face of spiraling demands for discounts and promotional support. For special promotions, trade discounts of 70% off recommended retail price (RRP) are not unknown, and promotional support payments of £50,000 are no longer mere fantasy. These promotions often take the form of "3 for 2," but half-price offers hit a new peak over Christmas.
The July publication of Harry Potter and the Half-Blood Prince (Bloomsbury, RRP £16.99) gave a taste of what was to come. Borders sold it for £9.99. The supermarkets typically priced it at £7.99. And one of the smaller supermarkets was selling it for an eye-watering £4.99. Some independent booksellers even stocked up at local supermarkets, which undercut their trade suppliers.
Unlike most titles, however, none of this was funded by the publisher, insists Bloomsbury chairman Nigel Newton. It all came out of retailers' margins. "If there are retail battles to be fought, they will be fought between retailers," Newton says. "It's not up to publishers to decide the price of books."
The autumn was tough for U.K. retailers of all sorts. Consumer confidence was waning, real estate prices stalling, and July's terror bombings hadn't helped the London trade. When Ottakar's revealed a management buyout plan in the autumn, HMV realized it had a one-time only opportunity to take out some of the competition. Its counteroffer focused everyone's mind on how life might change with a combined Waterstones and Ottakar's—promptly dubbed Wottakar's.
Mergers that create a combined market share of 25% and up are usually referred to the Competition Commission, which weighs them in the scales of public interest. HMV calculated that Wottakar's would have 24% of the entire book market. Opponents argued that, more pertinently, it would have more than 50% of the specialist market.
Waterstones and Ottakar's are the two main routes to market for range titles—and their range is getting narrower. While Waterstones already exercises disproportionate influence over the success of more literary books, Ottakar's does reflect a certain alternative in taste. A merged entity, publishers fear, would become a single gatekeeper to the market for rangebooks.
"We're anxious about Wottakar's on a number of fronts," says Ursula Mackenzie, CEO and publisher of Time Warner Book Group U.K. "Top publishers have all been cutting their lists, partly because it's not easy to get new books into stores. But when we look at what Waterstones buys and supports and what Ottakar's buys and supports, the two lists are different."
Some argue that Waterstones would have less incentive to maintain a wide range of stock once the competitive threat of Ottakar's was eliminated. "If Wottakar's happens, it will reduce choice for the consumer," insists Richard Charkin, CEO of Macmillan and current president of the Publishers Association. "And it's not just a question of the number of titles in stock, but also the number of promotional slots available."
The OFT received "an unusually high degree" of complaints. Authors like J.K. Rowling and Philip Pullman peppered the authority with reasons why a merged entity would be too powerful. "We are getting to the stage of commercial censorship," warned historian Anthony Beevor.
The OFT was clearly impressed by the weight of feeling on the subject. It acknowledged that useful competition existed between the two chains. Consumers, it noted, valued the lengths to which Ottakar's went to differentiate itself. It handed the file to the Competition Commission, which must make a decision by May.
By that time, Christmas selling was already in full swing and blood was starting to flow. All agree that WH Smith outmaneuvered Waterstones during the selling season, getting in early with a TV-led half-price promotion on some of the most promising nonfiction hardcovers.
"The high street had struggled all year and it needed a whizbang Christmas," recalls Amanda Ridout, HarperCollins managing director, general books. "So Waterstones responded with some extraordinary deals from the beginning of December." One of Waterstones' competitors puts it more succinctly. "They might as well have given them away," he maintains, without joy. But the more extreme cuts, as Ridout and many another publisher point out, were financed largely by the retailers.
By the time the blood had dried, the supermarkets and Amazon had enjoyed a very good Christmas, while the high street retailers were issuing dismal trading statements. Ottakar's is now suggesting that it needs the HMV bid in order to survive. As one cynical publisher has noted, its own price will have fallen in the wake of Christmas. Whatever becomes of Ottakar's, the ghost of the high street's tattered margins will be present at negotiations before the summer, most publishers expect.
"Like all publishers, we're finding that the amount of money available to advertise to the consumer is being squeezed by the amount needed to make the books available in the bookshop," observes Orion's Edwards. "The situation has become enormously more pronounced over the last three years. It got worse in 2005, and we can see that 2006 will be more difficult again."
The average selling price of a top 10 title in 2004 was £7.01, according to Nielsen BookScan. By last year it had fallen to £6.92. Publishers' receipts are rather less. Macmillan's Charkin says that his company gets an average £2.13 per book—"after 20-odd handlings between publisher and purchaser—that's pretty pathetic!"
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Marketing Shifts
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But there is a growing awareness that the industry has surrendered more than pricing power to retailers. "We have given up the marketing of our books to the retail sector," says HarperCollins's Ridout. "We need to influence consumers more. The days of the passive backlist are over."
Covers are getting more attention than they once did, particularly in commercial fiction—which has much less chance of being reviewed than literary work. "With less-well informed bookshop staff and no review, all the consumer has got to go on is the title and the jacket," notes Jon Wood, publishing director at Orion Books. "So there's a trend to concept-led fiction, where the cover can tell the story."
"Advances are no longer the total engine of the business," declares Jonny Geller, books department managing director at agent Curtis Brown. "Auctions tend now to be at a lower level, because publishers' ability to secure promotional slots has weakened—and they know that. The old idea was the higher the advance, the bigger the push. Now, if Tesco says no, it's over."
So retailers are replacing publishers as the author's bogeyman. Publishers may be talking straight with agents but they must be more circumspect with each other, at least in public. The competition authorities keep a beady eye on them and will pounce on anything that smacks of price collusion as anticompetitive behavior.
That means they are restricted to unilateral declarations of exasperation, signaling across the valleys that enough, surely, is enough. Yet that, ironically, may not be enough. "The big worry is that we are educating consumers never to pay hardback prices for hardback books," says Helen Fraser, managing director of Penguin U.K. "I don't think any [U.K. publisher] has reached a critical mass such that they can go to a retailer and dictate terms. It may never happen." Hachette's impending $537 million purchase of Time Warner Book Group consolidates U.K. publishing power, but not enough to make retailers tremble.
So come back NBA, all is forgiven? Some publishers continue to lament its passing. "We were very strong supporters of the NBA, and I would have it back tomorrow," declares Transworld's Finlay. "We know that's not going to happen. But everything we predicted has happened, though it took a lot longer than we expected. Bookshops have gone downmarket. WH Smith has been squeezed in the middle. The level of discounting in the U.K. is without precedent. It has gone far too far, and is confusing for the consumer. No other country in the world is discounting books at this level."
Still, others insist that the industry is a better place without price fixing. "The industry would be worse off if it was not able to use price," reckons Headline managing director Martin Neild. "The problem is that it has not used it constructively."
The best thing to have come out of it all, Neild adds, is the renaissance of the hardcover, previously regarded by many consumers as elitist and unattainable. "The book universe has proved to be bigger than any of us ever dreamed, as Harry Potter and Dan Brown have shown. Everyone shops in the supermarket, and the old assumption that mass market equaled downmarket has simply gone away. Small Island [a literary novel by Andrea Levy, published by Review, which sold 409,000 copies in 2005] is living proof. The downside is that it's a bucking bronco."
