The year just past was a significant one for publishing. At the beginning of the year, many of the large houses made ambitious leaps into electronic publishing. By year's end, most of them had cut those programs significantly. Large author advances were highlighted by Bill Clinton receiving an estimated $10 million—$12 million for his memoirs, following close on the heels of wife Hillary's estimated $8 million advance (in late 2000), and overshadowing New York Mayor Rudolph Giuliani's $3 million, two-book deal. Against this background, publishers received stark lessons in how quickly public interest can shift. Jack Welch's book Jack, for which publisher Warner advanced $7.1 million, came out on the very day that world events greatly changed the public's interest in books--September 11. The bursting of the Internet bubble made many business titles suddenly dated. It was also a year in which sales of bestsellers were soft, but the movies reminded us that some old bestsellers can become new again, with The Lord of the Rings as well as the surge in sales of the already blockbuster Harry Potter books.

To consider what this year meant and what the upcoming one might bring, Publishers Weekly invited the chief executives of eight of the largest publishing houses (see participants' sidebar) to a roundtable discussion in December. To accommodate schedules, two separate roundtables were held. The following story brings together the highlights of both sessions.

PW: Book sales have been flat over the last few years, advances are growing and Barnes & Noble CEO Len Riggio has called on publishers to increase discounts to booksellers. How do you feel about the health of the business? Jane--you have been pretty bullish on the subject.

Jane Friedman: I wouldn't say that I'm bullish, but I would say that I'm cautiously optimistic. A lot of my optimism is because we are a global company. We are looking at absolute record numbers in the U.K., Canada and Australia--not the least of which is coming from our Tolkien franchise [Houghton has U.S. rights to Tolkien in the U.S.--Ed.]. Our numbers for Tolkien in the first four months in the U.K., Canada and Australia are triple what they were all last year. There are the three Tolkien movies, so we assume that this is going to continue. Also, we are benefiting in America from the Harry Potter phenomenon, because we handle distribution for Scholastic.

I feel that, although we are seeing, in America, the hardest market at this moment, our children's business is way up, and our spiritual/religious business at Zondervan should be way up. The general book business is somewhat soft, though our numbers say that we are, at this point, ahead of last year. Year on year, we are behind a bit, but not enough to make me feel anything but cautiously optimistic. We have an aggressive budget for next year.

PW: David, Penguin Putnam certainly is a global company. Do you find that that gives you an advantage?

David Shanks: It's an advantage, but I would say that around the world, we're not as optimistic a view as Jane. We got off to a really strong start. In the beginning of the year we had the first two Oprah picks, which certainly helped. And then we swept virtually all of the major children's awards, and that brings business in. Peter Olson has been quoted in the press concerning a severe downturn. We don't see that. We're in the same camp as Jane--we were strong throughout the year. We've seen a dropoff of children's business at the lower end, the more mass merchandise kind of business. The more upmarket part of the business is strong, obviously not as strong as Harry Potter. I think the children's business is getting swept along with the Harry Potter phenomenon. If you cut out Harry Potter, it's probably not as robust as everybody thinks. Anyhow, we're feeling pretty bullish. We're not only going to make our plan, we're going to better our plan for this year. We also have an aggressive budget for next year. There's been some softness in some of the hardcover fiction, which has been more than made up for by a surprising strength in paperback fiction.

John Sargent: Book publishing, if you look at it as a profit-driven business, is not an enormously profitable business to start with. And it has an awful lot of risk. Size is what gets you by, in that if you have enough bets placed, the curve evens out. Therefore, the larger you are, the more even the curve. I do see the possibility of deteriorating profitability in the next year. I do see margin pressure in the next year. And I do feel that our reaction to that will be trying to reduce that margin pressure in every way we can. I don't think the book business is in trouble as a business. I think that people will continue to buy books. I don't see that a lot more people are reading books and I don't see a huge growth in population in the United States, therefore, I do not see a lot of growth on the top line, in aggregate, for the whole business. It's a mature industry with lots of cost pressures. It' s true that we've had a lot of growth in superstores and a lot of growth online. But if you look at what's going to drive our growth next year, I'm not sure it's out there. Though I am not pessimistic by nature, I certainly don't think it's an environment that calls for a vast amount of expansion.

PW: What would be some of the measures that you would take to, as you put it, "reduce the margin pressures?"

Sargent: Each company will have a different strategy, because of the way each is structured. So some companies have focused more, some companies have gone more widespread. Each company is running it their own way. The question I ask is, how do we make each book more profitable? And that goes straight from the discount you offer all the way down to what you pay the printer and everything else.

Jack Romanos: I would say that certainly the AAP statistics, the projections from the key retailers, would suggest that despite the fact that nobody here seems to be having a tough year, somebody is [laughter]. But you know, for many of us, our revenues are published every 90 days in the Wall Street Journal. So if you want to do a tally, you can take a hard look at the publicly traded companies and see exactly how well they did or didn't do, on either a domestic or international basis. Simon & Schuster, I think, is weathering the storm quite well. In our case, it's actually come from an aggressive frontlist publishing program. Personally, I'd like it to be both frontlist and backlist, but I'm not complaining, in the face of all of the dynamics that appear to negatively impacting us today--the downturn in the economy, rising unemployment, business failures within our community, shutdown of warehouses over the last number of months--certainly the impact of September 11, particularly for us, in the area of lost media. From our perspective, we tend to focus on next year, not this year or last year. We're already well into 2002 from a planning, publishing and even selling perspective. We're very optimistic about 2002, coming off an extremely successful 2001. John said it; I think everybody's implied it: in recessionary times, books tend to have, historically at least, been recession-proof. We certainly expect that will continue. I also think a lot of the things that hurt us this year, from an overall dynamic, were hopefully one-time occurrences. I don't expect to have another September 11th happen. I think the impact of the downturn of the economy is built into our culture. I think unemployment, as unfortunate as it is, has a short-term positive for the publishing industry because certain categories of books benefit from the fact that people are in a mode of personal development, self-improvement, getting their lives back on track. Not to mention the fact that they simply have more time on their hands to read. So I think it's not all bad.

I think it's a mistake to assume that sales necessarily has anything to do with profits in this industry. The fact of the matter is that if you look at publishing in general, I think you will find that it's a lot more profitable business today--despite what appears to be flat sales growth over the last four years--because there's been a new respect for management in publishing or maybe even new management in publishing that basically separates the art of publishing from the business of publishing. I think all of us have learned how to make more money for our companies. And to be honest with you, we're all expected to make a lot more money. The financial performance bar for most companies has been raised dramatically in the last decade. But we're all employed to hit that bar or get over it, and that's what we do.

Friedman: Absolutely. Those of us sitting around this table have been in this business for a long time. And we all came into this business when publishing was basically a cottage industry. We all had a great time publishing books and getting reviews and thinking, wow, this is great. Since that time, almost all of us have become owned by global media giants and it's incumbent upon us to have a profitable business. I think at HarperCollins, we are lean and mean; we are very bottom-line oriented while publishing very well.

Don Weisberg: Well, the first thing that I would like to say is that long-term, Random House is extremely bullish about the industry. We think that over the short term, the next six to 18 months are going to be very different. It's always been a cyclical business and I think that we're in one of those cycles where things are going to be tough for a while. Which means that we have to look at the whole business very carefully from a cost perspective, with the goal of coming out of this cycle as strong as possible. Certainly we're looking at our distribution levels more closely. But one of the things we're not looking at is doing fewer books.

PW: What do you think are some of the long-term factors affecting the publishing market now?

Weisberg: Well, I think that this is a real hard time, because whether September 11th has a long-term effect or a short-term effect, it has impact right now. For example, we published a lot of books into this period, and September and October were weaker than we expected. That's going to have an impact.

Bob Miller: It's interesting, I think, that the larger the house, it seems to me, the larger the concern about and the awareness of the downturn. There's more overhead that's involved, more that's at risk when numbers come in even slightly lower than expected. We're certainly aware of the downturn. And we see the effects on the highest-priced books and the less-established authors. Since we've always made books based on media, when media is distracted by news, it's more difficult to launch new titles, but in terms of sales levels, we haven't seen the pinch that much. But it's a much smaller list and a much smaller investment.

Jack McKeown: Well, we were having a remarkably strong year through September, working with a very strong backlist. I will be the first to admit that October and November were weaker than we thought, but we're seeing some balance in December. I think I would second what Bob said, that the more intensive your fixed-cost structure, the more vulnerable you are to change. We also find that the diversity of our list helps us find pockets of strength in any changing period, particularly related to the events of the 11th. There's a changing appetite for books, whether it's policy issues related to bioterrorism, the Middle East or simply academic texts that relate to the history of the Middle East and Central Asia--those things seem to be developing a kind of strength. I think that's confirmed from what retailers are saying, that maybe short-term we're actually seeing smaller, more pronounced changes in people's reading habits. Suddenly Americans are recognizing that they're part of a world stage, the world has suddenly gotten a lot smaller. And book publishers have a very, very vital role to play in that. In terms of the macro-economic environment, I'm probably more optimistic about the prospects for a turnaround in 2002, simply because if you look at this history of recessions in this century, the average is 11 months. If they had postdated the beginning of this recession to March, there's some feeling that we're already coming out of it [laughter]. I'm fairly optimistic that sometime in the second half of next year we're going to be out of this in terms of the pure recessionary economics that are driving it, with consumer demand bouncing back.

PW: Is it a myth that books do well in a recession?

Miller: I think it benefits some titles over others. Right now, the familiar, the less expensive, the shorter, the timeless books are selling at the expense of the expensive, the ephemeral, the lengthy. So it's not like everything stopped selling. I mean, we've seen two or three collections of poetry on the bestseller list. That's a remarkable trend, along with all the books that Jack was talking about that are topical nonfiction. So you see some of the shift away from the more expensive titles that have anticipated high sales--some of those sales have gone to new surprises.

Larry Kirshbaum: The business for us revolves very much around the titles that we're publishing, even more than economic trends. There's no question that October and November--early November--were way below expectations. But we've had a good run in terms of the titles that we have out there right now. And we are still in the category of being a relatively small house, compared to a Random House, Harper or even S&S. So for us, what moves our needle is the titles themselves. But I will say that in terms of backlist and the overall sense of vibrancy that one would like to see, that's been missing this fall. In a certain way, publishing has always revolved around New York, for better or worse. And let's face it, New York itself has been in a kind of depressed or subdued state, and I think that has to play though all of the media and certainly into publishing.

Weisberg: To follow up on what Larry said, it's not about whether Random House at the moment has as many bestsellers as usual, though we're really hot at the moment. That's not what measures whether we're in a recession or how much of an impact the recession is having. It's measured by traffic, by people looking into stores and buying books, and making multiple purchases. And there seems, at least until the last couple of weeks, what Larry pointed out, which is that there's not an excitement there, at the consumer level.

Kirshbaum: There's a certain escapism that people are looking for when they go into a movie theater. When they go to a bookstore, though, they seem to be looking more for serious reading rather than escapism. If there's been any single trend this fall that booksellers have noted, it's the fact that the bestselling fiction authors have for the most part done only equal to or less than in previous years. So the escapism principle has not worked as well for us. And I think there's been a shift more to the nonfiction side among book readers.

Miller: The television business--we've all seen the ratings. Very clearly the public taste has moved toward the familiar and the nostalgic forms. And you would assume that from that you would see the fiction brand names being the safe harbors, the familiar, particular, comfortable, predictable entertainment. So I'd have to guess that that's an aberration that has more to do with price and length.

I think you're seeing short books selling much, much better. For us it's Caroline Kennedy's collection of her mother's poetry; there's Steve Martin's Shopgirl; a business book called Fish! [A Remarkable Way to Boost Morale and Improve Profits--a gem of a small package, delivering a lot in a little. Less is more seems to be the theme.

McKeown: I would just caution that we are a much more diverse culture than we were 20 years ago. And I would argue that while it's tempting to generalize about how Americans have reacted to crisis in the past, and how they're reacting now, we may be too close to events to gain the right perspective on how Americans are reacting, particularly those of us who live in New York, where it all resonates in our daily lives. For the first several weeks, you could not have a business conversation that did not begin and end with a description of where you were on September 11. But what may be happening is that as certain books don't sell to their customary levels, other parts of the American appetite are becoming more apparent. We're becoming more aware of pockets of strength that were out there all the time.

Miller: Certainly a lot of booksellers have said that--they're talking about the male/ female, the gender split between nonfiction and fiction. The fiction list is becoming more and more predominantly for the female buyer and the nonfiction list more and more predominantly for the male buyer. All of the history and military history certainly could be bought by anyone, but I've heard a number of people say that they're seeing that split more and more.

PW: What do you see in the mass market? Any changes in buying habits there?

Kirshbaum: I think that mass market has certainly held its own, but the real dramatic growth of our business over the last couple of years has been in the hardcover and trade paperback sphere. For one thing, with respect to mass market, we've been hurt by the inability of our distributors to get total access to airport locations, which has been a negative. Mass market is carrying out the tradition of the successful matrix that we've always had, which is that fiction carries the load, brand-name authors continue to work, and, if anything, there are new authors who are creeping onto the bestseller list who might now work in hardcover. So mass paperback has been perhaps the steadiest of the categories, but I wouldn't say that it's shown any kind of dramatic increase. We're spending a lot of time, in fact, trying to find ways to stimulate our mass paperback business because it is so important to us.

Dealing with Costs

PW: Where have we seen the most costs being driven out of the business? Obviously, infrastructures have been improved, so is there any area you can point to for improvements? The supply chain?

Romanos: Since we are in the unique position of having to create an infrastructure after the sale of the educational parts of Simon & Schuster, while we have been able to reduce costs in traditional areas, we've actually incurred additional costs in the three- to four-year time frame. Now you can scoff at supply chain, but I have to tell you the most significant improvement in our business is in returns, sell-through efficiency and inventory management and production savings overall. We've been able to vastly improve the financial characteristics of our company, as a result of initiatives that ultimately led to the creation of a supply-chain unit that took a lot of waste out of the process. We've gotten much better at distribution, and manufacturing and inventory management. And I think the industry has as well.

Friedman: Absolutely. This is the most significant improvement in our business, I agree with Jack 100%. That, and just publishing smarter.

Weisberg: It's one of the things we've been working on for the last couple of years at least, working with our customers to do the best we can to take some of the cost out of the distribution, the inefficiencies that exist. We've been really focusing on that and will continue to focus on that. And we think that's part of the business: partnering with customers, partnering with suppliers to take as much of the cost out of the operation as possible. That's a whole win-win situation.

Miller: But those winnings tend to leave out the advance. I think everyone can see that the margin has been steadily eroded. The advances continue to grow, and eat up any improvements that we make elsewhere.

The established authors have actually more clout than they realize, if you can imagine such a thing. Because in a corporate climate, a publishing company needs to be able to predict ahead. The company would probably be willing to trade margin for predictability, and that's what an established author offers. So I actually think that there could be even more changes ahead for the established author's relationship with publishing houses.

If you know ahead of time what the entire profitability of the venture's going to be, shared between author and publisher, the question then becomes what is the share? And currently the share with the largest authors, I would guess, is somewhere a little ahead of 50/50. But that 50/50 could grow to be something worse for publishers because of that need to predict at least some piece of the business.

McKeown: I want to point out one of the more positive developments, which is the commissioning of shorter works in series format. Whether you're talking about the short biography series coming out or what we did this year in the fall--in the midst of a very distracted marketplace--a series called The Art of Mentoring, with which we're actually having real success. I think there's an opportunity to bring brand-name authors into contact with a series subject or ideas in economic terms that do not reflect the over-hyped, agent-driven marketplace that we've associated with these books. Because there's an activist publisher involved coming up with concepts, and authors that are attracted like a magnet to the platform that the series provides. It's something that I think is much more common in U.K. publishing that seems to be finding some traction in the U.S. And then when you do have developments in the news such as September 11th, you see a lot of those books having second or third lives--books on Islam and Afghanistan being the most obvious--so that's a zone that I find fairly positive. And I don't think we've exhausted the potential for that.

PW: What about the general nervousness in the industry, with whole sectors having tremendous cash-flow problems?

Friedman: I have always felt that doom and gloom can become a self-fulfilling prophecy. And it really bugs me. The fact is, if you keep crying doom and gloom, you're going to cause doom and gloom. And if we keep trying to make things better, improved, a better work environment, better morale, more support and weather whatever kinds of storm is approaching, we will be all right.

Romanos: There's not a direct correlation in any given year between the bottom line and the top line. The bottom line is influenced by things that have happened and decisions that have been made in prior years that happen to impact the current year. Returns, for example, tend to come from books that were sold in a different time. So I don't think that we should get hung up on comparisons. I think it's fair to say that this is a mature industry that is not going to have dramatic growth on an industry-wide basis. It's not projected to. It's going to have comfortable growth. Largely, I think, from inflation on prices.

Shanks: Yes, I would agree with that. The business has moved around from place to place, to the warehouse clubs, online, out of independents, out of wholesalers, into the superstores. So it's moved around, but unit growth, certainly for the past several years, has not been dramatic.

Romanos: It's important to note that seven warehouses closed over the last 18 months, and that's important because that's seven places that we no longer have to hide sales or books. It's probably also the reason our returns are improving. I mean, you can't minimize it, we don't brag about the fact that we're filling them up in years the sales are going up. But we're happy to point that out in years the sales are not going up, that we have fewer places, fewer warehouses to ship to. It has an impact on units.

What Books Work Best

PW: In today's climate, how does a house build an author? Have the rules changed?

Friedman: There was some thought that authors used to be made through paperback and today you don't have first paperback editions, it's all hardback and it's harder to develop authors because of that.

Weisberg: We used to be able to do that much more readily. We still try it, and once in a while have success. I may be a little naïve, but I think it's just as hard as it was 10 years, 20 years ago to break out in the novel. I think it takes an enormous amount of work. It takes a terrific writer. It takes a writer who delivers a great book and it takes a lot of effort on everybody's part: publisher, editor, booksellers. But it still happens.

Kirshbaum: I think Don is right. One of the problems today is that we live in an entertainment world where speed seems to have become a major priority. And that makes it more difficult to develop authors over a long period of time. I can remember when I was at Random House in the '70s, you could have an author like Anne Tyler; her first printing might be 5,000 or 7,500 copies and then she built over a period of 10 years, maybe even 20 years, into a bestselling author. The same is true of Elmore Leonard, who started out writing pulp westerns and then grew over a period of time. Unfortunately, when you get a new talent, there's a tendency right off the bat to rush into hardcover, to put out a huge printing because you want to get attention for the book and you're afraid that a printing of 5,000 copies is going to get lost. So right off the bat, you open yourself up to a certain kind of disappointment, where you can put out 75,000 copies of a book, sell 35,000 or 40,000, which is a significant number for a first novel, and yet have it perceived by the retailers as a failure because they were pushed into buying too many copies. And I think that's one of the tragedies that large companies tend to have: because of our cost structure and because of that need to make it with every book and this desire to hype things to their fullest potential, it's really hard for a book to be a sleeper and come out of the pack.

Miller: There's a paradox in the way large houses operate, where the acquisition decision is a very separate one, in many cases, from the marketing one. So the editor may be able to acquire at pretty high levels; e.g., "we're going to acquire this book for this much money." When the decision comes to what are we going to do to publish the book, it's really a decision about the list overall. There's a marketing budget for a group of titles, and if that whole level falls, then where does that leave that individual title? I think the negotiation eventually, inevitably, will shift somewhat away from advances and somewhat toward marketing commitments down the road. I think the smartest authors and agents are going to become more and more aware about acquisition decisions within the house: What is going to happen after the acquisition?

Weisberg: Not being on the publishing side, when I look at the books that Random House has broken out in the last two years, I don't see many repeating patterns. One of the beautiful parts about this business is that we live in a book-by-book world. Every book is different. Every book is unique. And so is every marketing plan. Maybe there's radio and maybe there's TV on virtually all of them. And whether you look at Seabiscuit, or Plainsong, or Iris Johansen, who's now broken out after 50 novels, or Harlan Coben--you name it. Each one of them is very different. With each one of them, the publisher had very different priorities, very different expectations maybe, but the salespeople got behind them, the customers got behind them.

Miller: The success stories are very different, the failures tend to have a lot in common [laughter].

Kirshbaum: Ours is a business that is really driven by passion, much more than by the bottom line. And I always like to say: don't confuse me with the facts, my mind is made up. And I think most editors and publishers go with their gut, for better or worse. It's very hard, the economics are basically against us right from the get-go, because even if you're in an earn-out situation, the author of a hardcover book is still taking 15% of retail, for the most part, which is practically 30% of your net receipts. So when you start with that, and then you lay all your other costs on top of it, your margins are not going to be very good. So what you really have to do, at least in a house like ours, is to operate on a sort of "home run or strikeout" principle, which is get up there, swing as hard as you can, and hope that you hit enough home runs to cover your strikeouts. And that creates an environment that is very hard to rationalize in terms of a cost structure, but I would argue that there is no rationality to begin with, because if you look at our business by any kind of standard profit/loss ratio, we come up short. Certainly I've very conscious of this in our company, where there are much, much better margins in almost every other division. But we still bring something to the pot, we can still make money and we can actually still make more money each year than we did the previous year, simply by building a backlist and then just continuing to have a certain number of hits. I tend to think that there's a book god up there, and just as something good happens, the book god says: now your next two books are doomed.

PW: Larry, you are probably the most emblematic of the whole year in terms of taking a big risk on a risky title, with the Jack Welch book.

Kirshbaum: Well, before September 11th, I felt, frankly, that this book couldn't miss, which is always a dangerous way to feel. You never admit that to anyone. But after a poor start, clearly because of the September 11th situation, the book has righted itself and it's finally started to sell at the levels we hoped for. Whether it gets to earn out or not, we'll see over the next few months. We have come to find that the titles where we had the biggest losses are those in the range where we pay $250,000 to $750,000 advances, as opposed to those titles where we pay over $1 million. Which doesn't mean that every agent should now dust off every old manuscript and say, well, here, it's worth at least $1 million. With the high-six-figure books, you're not getting Jack Welch for that price, you're getting, in many cases, a relatively unknown author on what is perhaps a very sexy subject or with a great outline. But actually there's a lot more risk in those titles. When you add up all the titles that you bought at those levels, you really do worse than you do with books where you might be paying a bestselling author $3 million, $4 million or $5 million for a title because that is a surer thing. So it's all relative.

Miller: You need to acquire books that have some sort of platform, some built-in platform. If you have an author with a top-rated radio show, for instance, you know that is going to be a platform. If it's a media-driven book, you want to know what that author has that's going to be able to get media on a day when the Today Show and Good Morning America are thinking about something else.

PW: We've heard a lot about backlist being soft. Why is that?

Kirshbaum: It depends on how you define backlist. If you walk into a bookstore today, the front is loaded with nonfiction books that are related to September 11--many of those are actually backlist but they may be classified as frontlist because of the fact that they've been given new lives. You have lots of Harry Potter and Tolkien. And then you have a tremendous number of new titles that are extremely appetizing. We're to some extent victims of our own success, in the sense that we're getting better and better at picking and marketing new releases, to such an extent and with such variety that it's very hard for the backlist books to carry the same weight. But that said, one of the CEOs of a major chain gave me this statistic, which I think is fascinating. He said, and this is a rough approximation, the top 100 titles deliver 5% of your sale. The next major breakpoint is 50,000 titles delivering 50% of their sales. So once you get below a relatively small number of new releases and bestsellers, you really do get into a backlist realm, and this is where companies like Jack's and Don's have an enormous advantage.

McKeown: Yes, for a business like ours I think it's important to distinguish between what I would call browsed backlist, which is driven very much by store traffic, and adoption or supplementary reading backlist, which we know is a function of what's going on at the college and high school level, what's being recommended and what's being put on professors' syllabi. And we think that, in a recessionary environment, the business of learning is ramped up. In fact, what we're hearing is that a lot of courses are being reinvented to take account of the fact that there is now this intensifying interest in history and global politics and policy. A lot of publishers, certainly not just Perseus, are going to be the beneficiaries of that.

I've noticed another phenomenon, and that is that the confluence of the events of the 11th and the downturn of the economy has compelled the news business to start to reinvent itself. I think there's much more substantive commentary, much more focus on in-depth reporting, and I think those are potentially very positive developments for writers, certainly nonfiction writers.

Weisberg: Price might have a big part to play in backlist sales. We haven't been through a recession in a long time, and I think the product base has changed dramatically. Trade paperback is a far larger format than it was. Prices are on an average higher today, excluding discount. That has to have an effect on multiple purchases. I would think that we would see that in the backlist.

The Retail Scene

PW: Is it better to have more outlets selling books or is it better, as in the old days, when bookstores were the main place to go?

Romanos: My roots are paperback roots, where the answer to that question has been: it's always better to have more retail outlets, a bigger mass market. And paperback publishers have been less dependent on the bookstore for 100% of their sales. What I see in my business, which is encouraging, is that that dynamic now seems to be extending to books of all formats. And while it's not possible for a nonbookstore to sell the entire list, there's no question that the mass merchants, the price clubs, the supermarkets, have figured out how to sell bestsellers and category books in a multitude of formats, and that's good for us as an industry.

I think we've had some success in getting specialty retailers to do what Jane is talking about. Cooking books in cooking supply stores. But our selling focus tends to be in the traditional market, so it's a harder sale for us to make, and you're also dealing with totally different dynamics. You've got a buyer whose job it is to know and buy clothing--they're not necessarily going to stop and take the time to consider a book as an accessory. But to some degree, it's a bigger opportunity and we do capture more of it than people may realize.

PW: Do you worry about the future of independents? Their share has been diminishing to 14% -15%. Is that offset by sales through the Internet or through stores like Costco?

Romanos: Somebody recently reported that Internet sales were about 7.5% of the industry and the independent bookstores were about 13% or 14.5%. And it struck me that if you looked at the numbers pre-Internet, the independents were about 20%-22%, so it would appear that there's a lot of cannibalization as well as supplemental sales that are hurting the independent and the chain bookstore alike. On the other hand, it appears on the independent side that there's some stabilization. I think the Book Sense effort is working, their organization is stronger. Maybe the shakeout is completed for the time being. It's an important channel to any publisher. They make books happen, they still handsell, they still care, they still are owner, proprietor, manager and salesman all rolled into one. And I don't think that any of us could afford to publish as many books as we do if it weren't for the independent bookseller.

Sargent: Legally, we treat all booksellers the exact same way, so we can't have a preference or drive one aspect of the market up or down. It's beyond our scope to make efforts to push one segment up at the expense of another. But I think that the independents, more and more, are healthy. Particularly the larger independents seem to be very healthy, and their reactions to change and their evolving business practices seem to be serving them fairly well. So I'm encouraged by the independents.

Romanos: I think, too, that while it doesn't manifest itself in obvious support, most of us would have difficulty rationalizing our existing sales organizations if there were no independent bookseller channel. We truly don't need to do a lot of the things that we do to reach the other channels. We spend a lot to support that channel from a sales perspective, and gladly. I think it's the only way to reach it.

Miller: The Book Sense program has been remarkably effective. Carl Lennertz deserves enormous credit for having galvanized that community. But again, when we send advance readers' copies, they don't only go to the Book Sense list, they go to managers of Barnes & Noble and Borders and Books-a-Million stores, too. And the people who work in these stores are readers--they may not be able to read the hundreds of advance copies that they get, but often they'll gather around the same few. Word of mouth can spread through that community, whether it's an independent or a chain.

Weisberg: I find very few people in this business who don't want to be. They want to read. But the fact of the matter is, whether it's a chain or whether it's an independent, there are books being made because they're terrific books, and that's the single most important thing in marketing.

Kirshbaum: I think for us, you know, we love all our children, but if there's one thing that I've hated for the last 15 years, it's the litigious environment that existed between the chains and the independents, which tended to make it seem like there was this huge schism in our business. On the one hand, you had the chains who were supposedly very impersonal and didn't care about the business. And on the other hand, you had the independents who just loved the book business too much and were being squeezed out. And I think that's a lot of bunk. The fact is that the good independents, the strong independents, have not only survived, they're flourishing. And by the same token, the large chains are displaying our books and selling our books in enormous quantities. And it's true, the independents clearly are more able to focus specifically on books that they love. And that's great because they can pay much closer attention to regional books, to books that their buyers personally love and so on. The chains, on the other hand, have the advantage of being able to offer enormous distribution capacity, which we need. The thing that has made me excited about Book Sense is that, for the first time, the independents are beginning to think in terms of their marketing as if they were a chain, a federation, if you will, marketing titles on a national scale. And that's what we need. Because when all is said and done, let's face it, books are a very small part of this culture. Yet to us, they're everything.

McKeown: When it comes to making a book, more than likely it's not the managers or the owners of the store who make the book, it's the people who are on the floor who are reading books, who are handselling books. It's our responsibility to get those books to them so they can read them. And they could be working in a chain or they could be working in an independent.

PW: What about online sales? How have you seen sales patterns changing?

Miller: We're not seeing the hypergrowth that we were seeing two years ago, but one thing is consistent for us: when I look at the weekly spreadsheets from or B& , we are seeing the same phenomenon that we observed two years ago--about 20% of our list accounts for the majority of our sales.

Weisberg: One of the reasons we are so optimistic about the long-term health of this business is that there are so many more books and so many more types of formats for books available today. Whether it's the Internet, whether it's print-on-demand, e-books, whatever its format, they're just so much more available to the reader.

PW: Are you concerned about title growth?

McKeown: At the beginning of this year, we made a conscious effort to reduce the amount of title output, probably by about 10% or 12%, and that seems to have organized some of our cost structure consistent with where we are going to put our marketing resources. You can't be a good gardener unless you're constantly pruning the size of your list. Increasing the revenue richness of the titles you offer is one of the ways you grow your business.

Weisberg: At Random House, each publisher pretty much has the freedom to run his or her own operation. There are no mandates or anything like that to cut or to not publish more books. I think you do what your capacity permits.

Miller: We hit what we feel is our optimum number about three years ago, which is 130 books a year, about half hardcover, half paperback. We have 50 people supporting those titles, and that seems to be a good balance of number of people, number of titles. There's just a certain number beyond which you lose track, you can't focus.

Kirshbaum: There's only so much energy that the house has, and there's only so much retail space available to each publisher, ultimately. If you simply add titles just for the sake of trying to overcome an overhead, you're doomed to failure, ultimately. We're living in a business where hits matter, recognition matters--and where every author, more than ever before, is much more involved in their titles. Today it's much more of a collegial, cooperative process, where the authors are really looking over your shoulders and saying, what are you doing to make my book a success?

Looking at the Staff Picture

PW: What about being lean and mean? Is this changing the structure of publishing houses? Is it true that a lot of the editing ends up being done on the agent side or that things get sent out of house to freelancers for editing?

Romanos: I'd say the opposite. From our perspective, we're actually moving in the other direction, we're pulling a lot more of the previously freelanced copy-editing and proofreading inside. I don't see the actual impact of the desk editor or the acquiring editor changing in any way. I mean, if agents are editing books, that's fine, but we edit them again when they're finished. I think if you're talking about lean and mean, our weight loss, if you will, has occurred in almost every other area. Digitalization has allowed us to be effective on a global sense of not having to do the same thing repeatedly in three or four different countries. We can feed our U.K. or Australia people information that we used to have to re-create or duplicate for them. I think we've all been wisely cautious of tightening our belts in the creative areas.

I can tell you that in the last year at Simon & Schuster, we have certainly gone contrary to that. In fact, the reorganization of our adult publishing actually created a new imprint and expanded an existing imprint, in the sense that Pocket Books was broken up into two businesses, with two heads, as opposed to the old model of vertical publishing, which we think just isn't the right model for today's market. The Free Press was expanded from a largely academic publishing company into a full-scale publishing company. Jobs were created, not eliminated. The only way we can grow is through publishing. You can't grow by cutting costs. You can't shrink to greatness.

Shanks: I agree. We've found that the freelance costs are much more expensive that doing it ourselves. So we have been bringing in as much as we could. We have been promoting from within, so we've had a number of editorial assistants that have recently been promoted.

Friedman: I think that you can be lean and mean by having fewer people but perhaps paying them more. I am an advocate of raising people up from within. I think it's the most important thing we can do.

Romanos: I think, too, that we've survived as an industry the loss of talent to the Internet startups about 18 to 24 months ago. I know we've seen that at Simon & Schuster. We've also done one other thing, which I hope works--we've embarked on a massive diversity effort this year.

The Electronics Enigma

PW: So what is the future of digital distribution?

Friedman: Marketing over the Internet is fantastic, because as I like to say, if you do a book for one-armed divorcées between 40 and 50, you can get directly to every one of them. And I think that this is where the Internet has become a marketer's dream. I am also optimistic about e-publishing. I think that I've made it clear that HarperCollins was going to be a modest player and with our modest expectations, we are reaching the numbers that we wanted and, in fact, are going beyond. I think that e-publishing will find its way--I feel a bit more slowly than my colleagues feel, but I do think that there is definitely a marketplace for it.

Sargent: I would say that in the short term, the print-on-demand aspect of the digitization of books is where the majority of the profit will be, and that has to do with infrastructure savings that come along with that. There are a lot of things that print-on-demand can do, where you can see some actual direct profitability. Electronically, I think we were way ahead of the curve, and now the curve either catches up or doesn't catch up. We have spent a small amount of effort to make sure we make some money as it goes forward. And that will continue to be our stand on this. We don't have people, we don't have infrastructure, we don't have marketing, but we try to make a little money on it.

Shanks: I'm probably the least bullish on electronic publishing. I think my colleagues in the industry didn't really think it out very carefully when they announced the various terms and conditions for e-books. And if anybody put some numbers on a piece of paper, they'd find that they were making less money selling an e-book on some of these terms than they were by selling a paperback version of that book. I know that we and Harper are probably the only two who didn't jump onto the bandwagon early on. What I was trying to do was to differentiate what a retailer for an e-book is in my mind. And why should e-tailers get the same discount that they get for paper versions or better? So I didn't think it was a market, and I still don't think it's a market, other than a curiosity market. We're in it because we need to be in it for our authors, and we have a various number of ways to deliver the electronic books, but there haven't been a whole lot that have been delivered.

And the ability to hack virtually all of these programs is still very real. Also there's the volatility of the market. People ask for your electronic files so they can sell books, but you know the first one that goes bankrupt, your electronic file goes into the bankruptcy and God knows who's going to buy it or what they're going to do with it. There are a lot of issues around author protection that I have a problem with, so we will be very slow to enter the market.

Romanos: Well, there's e-commerce, there's e-distribution and there's e-publishing. E-commerce is already healthy. We've talked about online bookselling, and the potential of that is, I think, unlimited. On e-distribution, I agree with John: I think we got distracted by the success of Stephen King's e-book Riding the Bullet and took our eye off the fact that print-on-demand is a much more urgent and immediate opportunity for the publishing industry than electronic books are. And that is moving along slower than we had originally thought, but hopefully it will pick up some steam. There's not much for publishers to do right now except to get ready for the day when reader technology is perfected, is developed to the point where it is a standard option, perhaps a hand-held device that will be bigger, more readable and more booklike, and at that point, our work begins. We have no choice now but to simply stockpile and convert the inventory that will be in place when the demand is there. Is it two years out, three years out, five years out? I'm not sure anybody knows. I have been out to the West Coast to meet with people at Microsoft and Adobe and Palm and Gemstar and talk about what they envision in terms of the evolution of the device. And I can tell you that there's no similarity between what we now know as an e-book and what they see as a Web-based media center. That is extremely exciting. Remember, the paperback revolution happened 60 years ago because it took books in a new format to readers where they were. The mass merchants, the supermarkets, the terminals, the drugstores, they weren't buying hard covers so they weren't selling books. But the new format of mass market paperbacks put books in front of a new reader. And they created a market. Our next generation of readers is currently sitting in front of computers. They're not in bookstores, they're not in book departments in the malls. So it seems to me that the e-book gives this industry an opportunity to put the book in front of a potential reader rather than trying to get the reader to leave the screen and go find a book. That alone makes it worth pursuing.

Friedman: I wish I agreed with you. I'm just not sure that it's going to be a market that in our lifetime we're going to see evolve into what the paperback market, or anything close, evolved into.

Shanks: What little we do know about this business is that price is going to be a big issue, that the model that's out there now of trying to sell the book in whatever is the prevailing format is not going to work. Then you have to ask yourself why you're bringing it to the market—is there a reader who would buy the book if it wasn't available in electronic format at a low price? Are you going to trade off a higher-price sale for that sale?

Kirshbaum: Well, on my own behalf, I would like to cite Arthur C. Clarke, who said that in the short term, we tend to overestimate technology, and in the long term, we tend to underestimate technology. So my belief is that we, or I, fell victim to perhaps a little bit too much passion too soon in terms of the potential for e-book publishing, as opposed to e-book reprinting, which is still going to be a very significant and growing business. The basic problem is that the e-book readers, the reading devices, have not yet approximated the experience of reading on paper. And as I've said, maybe in the end, Gutenberg is the killer app, because no one has been able to top it after 500 years. As for our experience of e-publishing, it was just a case, as Dick Parsons, our new CEO, said to me, that sometimes being too early is as much of a problem as being too late. And we were just too early in terms of e-book publishing.

McKeown: We're printing about 50,000 books a month on our own print-on-demand machines. Some 70% are books that would have been OP under our traditional economics. So even while we're trimming some of our frontlist publishing, we're preserving books longer on a backlist. These tend to be more academically focused books, many of them sold at little or no discount, so the margins are healthier. What we're doing is printing in even carton quantities, using it as low-inventory replenishment. We're now printing three to four to five times a year. So that's having enormous impact. We're seeing very steady growth. Print-on-demand has the power to focus on the long-term revenue potential of the books' pure cash contribution. It subverts the traditional economics of backlist publishing quite dramatically in favor of everyone.

Books for Children

PW: Children's publishing seems to be healthy. Are you expanding your lines?

Friedman: Well, I should just say that Harper Entertainment Children's having the Mary Kay and Ashley franchise has just been absolutely extraordinary. Lemony Snicket has been a phenomenon around the world. Children's is solid, wonderful. That's the one area in the U.K., interestingly enough, that is not that strong, but that will grow.

Romanos: One area that concerns us, and it's related to children, is the whole young adult, the nine-to-14-year-old group, which we have seen disappear as a book market--the core that drove the Sweet Valley High, Sweet Dreams—type series.

Friedman: Yes, something's happening to that group.

Romanos: For the last 15 years, it's been a huge business for anybody in it. It's largely now deferred to people like Scholastic, who can put the books in front of the consumer in a different way. And many of us have moved the age bracket up by successfully creating imprints for 17-, 18-, 19-year-olds. But we've lost that 'tween, as you say, as an easy target.

Weisberg: It's an enormous growth area for us, obviously, as evidenced by some of our actions of the past year: the acquisition of Golden and working with Disney. After September 11, a lot of people wanted to hunker down, and there's no better way to do that than sit with your children and read.

Kirshbaum: We're very committed to children's publishing. We have a relatively small list, but we have a new publisher, David Ford, and I agree wholeheartedly that this is an area of publishing that is much more rational than the adult world. You have an opportunity here to publish the old-fashioned way, with real backlist opportunity, developing authors more slowly, with a better advance structure. I mean, everything is going for you on the juvenile side. Harry Potter has had a tremendously positive impact in that it has opened up, literally, millions of eyes to the possibilities of reading.

Miller: Some of our children's publishing connects to the larger company, Disney, very effectively and some of it is just terrific, new material, and it is less volatile than the adult business. When children's books work, they work better year after year.

The Crystal Ball

PW: What new growth areas do you foresee for 2002?

Friedman: Well, we are certainly being aggressive in the African-American market, both in backlist and mining a backlist--it's very rich. And also in new publishing. To that end, we've hired a woman named Dawn Davis, who I think is going to be quite significant in that marketplace. The Spanish language, I am very keen on that. But most importantly, I am very keen on maximizing global publishing, the notion of publishing simultaneously in the English language around the world. I think that that has the most potential. And I have a fantastic infrastructure in Canada, Australia and the U.K. We have a very collegial team worldwide and I think that that's the first way you begin global publishing.

Sargent: We are smaller and have a series of independent companies, and we still have an awful lot of opportunities to exploit rights in channels that we aren't in yet. And that's where our focus will be: trying to make sure we maximize all the channels of distribution for all the books we do. We have an awful lot of books that over years with hardcover publishers didn't have paperback options that we need to focus on.

Shanks: I guess our aggressiveness will take two directions. One, we're starting new imprints with Bill Shinker and Adrian Zackheim. From an editorial standpoint, that's exciting. I think we'd like to take advantage of some of the synergies that we have with our parent, Pearson Education, to push some of our business books through the professional publishing operations that they have, to look at some of the back-of-the-business kinds of things that we can put together, things like IT, payroll, accounts payable and so on.

Romanos: I think, unlike David and Jane, our international operations are nowhere near as mature or large as theirs. So we're banking on some of our growth for 2002 coming out of the U.K. operation and an expanded effort in our Canadian area. Our U.K. operation is, I think, finally in place at a level that is competitive. They just finished their second year in a row as the fastest-growing U.K. consumer publisher. Having said that, our market share is considerably lower in the U.K. than it is here. On the adult side, we're expecting to continue to outperform the industry, which is sort of our annual mantra anyway. I think we'll see the benefits of the reorganization that we put in place under Carolyn Reidy last spring, and we're seeing the beginning of a turnaround in the mass market area. Audio is a business that has been flat, and I think will remain flat for a while. And children's publishing, which has been historically a good growth area for us, is going to continue to be, partially because we're fortunate to be married to a media company. We've been able to really work the Viacom brands, and Nickelodeon in the case of the children's industry. And the licenses that have come out of that have been the backbone of the Spotlight imprint for us.

Miller: Looking ahead, we're going to continue our kind of scale of number of titles and number of people. We think that that's a really good size for us. The focus going into the future will be more and more looking for those built-in platforms I was talking about. We'd love to build more fiction, we continue to selectively build a small group of authors, but it's going to continue to be a mostly nonfiction list.

McKeown: We see a time of contraction as a breeder of opportunity for opposition-minded independent companies like us. So we would hope to make an acquisition or two in 2002. On an individual title-by-title basis, I think we've made the decision to defer some titles in our business program, mindful that it is a weak area in the stores right now. And we're taking a very hard look at the cost structure.

Weisberg: We're continuing to make the best moves in author development; we're not curtailing title acquisition. We are making investments in publishing talent, we're making investments in marketing and new ventures. At the same time, as Jack pointed out, we are being prudent with our costs, we are looking at the difficult short-term period. I think we're going to bounce back stronger than ever as an industry, and we want to be in a position to be as good and as strong as we were before the recession began.

Kirshbaum: Even with our writeoff on the e-publishing side this year, we are still going to have double-digit earnings growth. We have had, basically, in spite of everything, a very good year this year relative to the industry.

We really are oriented in a very simple fashion. We go for big bestsellers and try to build a name brand franchise for authors who continually repeat themselves year in and year out. Then, especially with Little, Brown, we have the opportunity to go to the upmarket side and try to develop a certain number of authors who can work in hardcover and then trade paperback. And we are being a little more cautious in terms of our overhead. We are not planning to expand staff. We are, unfortunately, holding raises to a much lower number than we would like. But we look to the future in a very bullish way because basically we're optimists. And I don't think you can publish unless you're an optimist.

PW: Thank you all.