Harry Potter has a tale to tell about book retailing

Sky News was kind enough to ask me to go on air last week, cast as a “marketing guru” as a consequence of my efforts in this column, to talk about what they called “the Harry Potter phenomenon”. I accepted out of curiosity and a desire to impress the children, but it’s amazing what you learn from these exercises.

Evidently Bloomsbury, Harry’s publisher, is embarking on a record print-run for the next volume, the title of which was broken on the front page of The Sunday Telegraph, so it must be big news. The author, J K Rowling, is now richer than the Queen or something. In any event, she will have made very much more out of the marketing of Harry Potter than Ian Fleming ever did out of James Bond.

And it was the T-shirts and all that merchandising palaver that Sky seemed interested in. They listened to me politely when I said that this wasn’t really the point. The video rights to Harry, I gather, have gone to Time Warner. It remains to be seen who gets the movie rights, Steven Spielberg’s plans for Potter The Movie having been spurned because he wanted to cast an American as Harry.

Time Warner knows a thing or two about the relationship between content and online distribution, having struck the biggest merger of all time (subject to regulatory approvals) with the world’s largest Internet service provider, AOL – as well as fashioning a joint venture with EMI, the British crown jewels of the music back-catalogue.

In the same way that the music industry is undergoing a distributive revolution through the Internet, Harry Potter and any other literary icon will soon be squirted digitally down-line to our children’s lap-tops, and bought as books by doting godparents.

This is interesting, in so far as there is not enough creative content to go around the online distributive media. So artists such as Rowling can call the shots to some extent. But there are two points that will have to be hammered out here. The first is that such authors may need to be protected from rights owners, such as Time Warner, which have a tie-up with only one online distributor, such as AOL. This is one for the regulators.

The second is that precisely because good creative content is at such a premium, online distributors and retailers are having to buy market share. I gather that books e-tailer Amazon is already discounting heavily the next Harry Potter edition. Given that these books would walk off the shelf at almost any sensible price, it is intriguing that margins are already being narrowed to win sales volume.

That makes books retailing a fascinating market at the moment. It seems an age since the old cartel of the Net Book Agreement was broken and innovation was brought to the previously rather dull books trade. So long, in fact, that one is tempted to presume that book shops – the ones in the high street – are a retail feature of the past century and that all the action is online with Amazon and its crew.

But, while EMI’s shareholders were considering the virtues and vices of its joint venture with Time Warner earlier this week, there was (and is) a book-retailing situation in the background of commercial significance to them. EMI holds 41 per cent of HMV Media, the vehicle into which WH Smith divested Waterstone’s, the chain that did so much to change the face of UK book retailing.

Now, HMV Media is saddled with debt – &£300m, I gather, but some weekend press reports put the figure as high as &£550m. EMI faces further draw-downs of capital investment to HMV Media – not least to service the debt – at a time when it could do without this financial millstone, as it cosies up to Warner.

Word on the street has it that Waterstone’s is worth &£300m. Or, rather, &£300m would be more than a fair price for the business, given that its sales performance has recently been poor and it has lost direction. The elegant solution for HMV Media and for its major shareholder, EMI, must be a sale of Waterstone’s.

Such a cash injection would alleviate not only HMV Media’s debt burden, but also remove at a stroke any prospective debt covenants that are troubling EMI and its new partners. Moreover, HMV Media, with some parental care from EMI, would be free to concentrate on its core activity of music retailing, a business it knows and in which it can perform.

The question arises of who might come up with an attractive proposition for Waterstone’s. German media giant Bertelsmann is said to have sniffed about, as has US books retailer Borders. More of an outsider is US competitor Barnes & Noble. But, as yet, the price hasn’t been tempting enough to attract HMV’s and EMI’s undivided attention. Perhaps Tim Waterstone, the chain’s founder, could return to the fray with a solution.

In any event, a solution must be found. Not just for HMV and EMI, but for Waterstone’s itself. Shares in Amazon plunged by 23 per cent last Friday and are now half their December value, as the online concern faces a cash crisis. The dot-com industry has massive problems of its own, but a properly-managed Waterstone’s could go a long way to re-invigorating a retail sector that deserves better.

George Pitcher is a partner of issue management consultancy Luther Pendragon