'Potter's' retail profits are illusory

By Josh Getlin and Martha Groves

July 16, 2007 12 AM PT

Times Staff Writers

NEW YORK — The numbers are staggering: More than 12 million copies of the final Harry Potter book have been printed and are ready for shipment. Booksellers expect 7 million copies to be sold in the first 24 hours. Even more copies are being rushed into print, even though the hotly awaited title will not be released until midnight Friday.

It should be a great moment for the publishing industry, which for years has been limping along with flat sales. But amid this avalanche of commerce and pre-publication hype, the book business is ruefully taking note of a startling incongruity: Very few U.S. booksellers will be making big money from “Harry Potter and the Deathly Hallows.”

Indeed, as the competition heats up this week to lure customers, a price war has slashed the retail cost of J.K. Rowling’s final installment by 40% to 50% at chains, big-box stores, and online retailers such as Amazon.com. They’re selling the books for little more than they paid the publisher.

Call it Harry Potter and the Vanishing Profits.

“Virtually none of these sellers stand to make big money on a book that is likely to be the biggest-selling hardcover title this year,” said Albert Greco, a publishing industry analyst and business professor at Fordham University. “The larger retailers are selling the books at pennies above cost, mainly because they don’t want to lose an edge to others offering the same deal.”

When it comes to bestselling books, retailers typically get discounts of up to 50% off the list price from publishers. But Jeff Bezos, Amazon.com’s boss, bluntly warned shareholders last month that his company didn’t expect to make a profit on the final Potter book. At Barnes & Noble, Kim Brown, vice president of merchandising, said the chain had to cut the price to be competitive.

Boon for book world

During the last 10 years, the Harry Potter phenomenon has sparked major changes in the book world: The series transformed young-adult fantasy fiction into a hot genre for adult readers too. It brought Hollywood-type sales figures into the publishing business and set off a stampede among hungry publishers to find the next Harry Potter bonanza.

As the final book’s official July 21 release nears, the fifth Potter film, “Harry Potter and the Order of the Phoenix,” took in $44.8 million in its U.S. box office debut Wednesday alone. It’s one of those rare moments when an impending book appears to have ignited the market for a movie. With 121 million copies of the novels in print in the U.S., and 325 million worldwide, the audience is ready and waiting for any Potter product.

But among booksellers, the seven-part series, along with other blockbuster books, has fueled a heated competition to keep or increase their market share at a time when sales are steadily decreasing in bookstores.

The basic strategy for chains such as Barnes & Noble and Borders as well as online sellers is simple: They hope to attract more customers with lower prices. The chains in particular want to build loyalty by holding elaborate release-night parties, just like independent stores do.

“Our everyday best-seller list is 30% off, so this lower price is not all that drastic,” Brown said.

But will the strategy work? Some call it a dangerous gamble, because the so-called halo effect, in which customers come for one book but buy other similar titles as well, has rarely materialized. “Harry Potter is a remarkable phenomenon,” Greco said. “But he’s a one-hit wonder.”

Indeed, at big retailers like Target, Costco and Wal-Mart, the wizard from Hogwarts is just one more loss leader -- a heavily discounted brand name that brings in people who also buy toothpaste and beach chairs.

In a cruel irony, these giant retailers have become a supplier of Harry Potter books for smaller, independent book shops, which in some cases get better deals from big-box stores than from regular distributors.

These independent stores, in fact, may be the biggest losers of all, because they operate on smaller economic margins and cannot afford to offer such deep discounts. In Southern California and across the nation, many are offering the book at or close to its full $34.99 price, hoping that the elaborate Harry Potter parties they throw on the night the book is released will attract large crowds of loyal customers.

At Village Books in Pacific Palisades, the owners will throw a release party on Friday night and offer a 20% discount on the book. Still, the shop stands to break even at best when all the excitement dies down.

“I don’t think [the Harry Potter series] has been the profit center it could have been if the publishing world had tried to keep this a book for booksellers,” said Katie O’Laughlin, the shop’s owner. “That’s a sad thing. This was the one time you had a book that people really wanted.”

Tina Jordan, vice president of the Assn. of American Publishers, said discounting worked, because sales were higher during a Harry Potter year.

Veteran agent Jane Dystel said, “The excitement over a new release gives the business an uptick for two to three weeks.”

Yet others believe deep discounting can be perilous, even though it is an obvious plus for consumers. Booksellers don’t get too many opportunities these days to cash in on titles with such a mass audience appeal, so “this becomes a very dubious strategy, very troublesome,” said Publishers Weekly Editor Sara Nelson.

Some critics invoke a Hollywood analogy: If audiences of record-breaking size were lining up to see the latest Harry Potter film, would hard-pressed theater owners then slash ticket prices in half to lure customers?

“You can’t make money that way. It would be absurd,” said Ron Hogan, who co-edits Galleycat.com, a publishing industry website. “To me, this whole discounting frenzy is a race to the bottom, a contest to see who can whack prices the most, and it doesn’t really bode well for most booksellers.”

Independent struggle

For some independents, it’s just one more confirmation of how the American book market has changed profoundly, and not for the better.

During the 10 years that Rowling’s books have set sales records, thousands of the nation’s smaller bookstores have been priced out of existence, partly because of competition from large retailers. The bookselling market has expanded to include drugstores, supermarkets, even home furnishing stores, all of which offer deep discounts.

As the Harry Potter book frenzy ignites -- for the last time -- it has become a grim rerun for many of these beleaguered stores. They’re trying to look on the bright side and figure out clever marketing schemes to help boost their bottom line.

The best strategy, Galleycat’s Hogan suggested, may be for indie store owners to be patient and wait for the hubbub to subside. In the long run, he suggested, loyalty to bookstores is built less on lower prices than on service and attention.

At A Whale of a Tale in Irvine, owner Alex Uhl bemoaned the lack of profits, but added: “There’s so much Harry Potter has done for hardcover fiction. The kids that read Harry Potter then want to read something else. We’re able to suggest things.”

Initially, Uhl decided to offer the seventh book at a 40% discount to match the chains, even though “the people who shop here would have paid whole price.” She then backed off to 20%.

Whatever the shop makes, Uhl said, will go toward the Potter party. “To me, it’s a sense of community, bringing people together,” she said, “people who are going to share this book and get into literature. I’m concerned about building readers.”

Book Soup in West Hollywood is using Harry Potter as a tool to bring in new customers, said its publicity director, Tyson Cornell: Buy a $100 gift card and get the new Harry Potter book free.

The publisher, Scholastic Inc., Cornell said, “isn’t favorable toward that kind of promotion.”

Not all independent stores agree with the gloom-and-doom over Potter profits.

“I continue to be astounded by the gnashing of teeth about Harry Potter discounts and how cheap the book is at some outlets,” says a Thursday posting at the book-trade website Shelf Awareness (www.shelf-awareness.com) attributed to Steve Bercu, owner of BookPeople in Austin, Texas. “We have sold over 1,100 copies and fully expect to sell out the 1,500 we ordered by next week -- all at full price.

“Independents cannot compete on price with outlets.... Instead we offer a great party and an atmosphere that parents will happily bring their children to enjoy.”

The big bankers

When it comes to profits and Harry Potter, the only true winners are the book’s publishers -- starting with Scholastic and, in Britain, publisher Bloomsbury, which have raked in hundreds of millions in revenue from the books -- and Rowling, who legendarily scribbled down the idea for the first book on a British train ride in 1990 and is now said to be worth $1 billion.

Asked about the price wars over the final installment, Lisa Holton, president of Scholastic’s trade and book fairs division, took an arm’s-length view: “Obviously sellers set their own prices and make their own decisions,” she said.

“But in terms of these decisions, there is no other single event in publishing that creates a moment when so many people are walking into bookstores, in this incredible sense of celebration,” she said.

Holton and other publishers are on the lookout for signs of the next author, the next fantasy series that will capture the public imagination. Scholastic and other houses have already lined up new literary candidates -- some with lucrative movie deals attached -- that are scheduled to be released in the next several years.

“There will never be a replacement for Harry, because Harry is the only replacement, and booksellers know that too,” Holton said.

“We’re always looking for new writers. But we can’t tell you who, where or when the magic will strike again.”

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Getlin reported from New York, Groves from Los Angeles.

(BEGIN TEXT OF INFOBOX)

Pricing Potter

The list price of “Harry Potter and the Deathly Hallows” is $34.99. Here, based on typical publishing figures, is where the money goes for each copy sold:

Expenses---Cost

Discount given to booksellers by the publisher-- $17.49

Author’s royalty*--$5.25

Corporate overhead (editorial salaries, etc.)--$5.00

Printing costs (paper and binding)--$3.32

Marketing--$1.40

Net profit for publisher--$1.40

Plant costs (editorial, artwork, etc.)--$0.70

Returns (unsold copies sent to publisher)--$0.35

Inventory write-off (defective copies/unsold in warehouse)--$0.08

Total: $34.99

*The exact terms of author J.K. Rowling’s contract are not known.