PW: Scanning the Globe for Growth

Among American publishers, the largest and most sophisticated global operations are usually found at professional and educational publishers. "With only a few exceptions in the college and professional ranks, few American publishers looked to international markets years ago," Scholastic chairman Richard Robinson notes, adding that "trade and school publishers came to the market later."

Although trade publishers and professional and educational publishers approach the international market in different ways, most publishers are bullish on the long-term prospects for growth abroad, although the economic problems in Asia could slow down expansion in the coming year. As S&S's Maleska explains, S&S holds huge market shares in the various publishing segments in the U.S., which makes further growth hard to come by; but it has a very small share of the worldwide book market, which offers a much better prospect for growth than the domestic one. S&S's international sales grew at an average rate of 20% between 1992 and 1996, and Maleska says international revenues will be up by more than 20% in 1997, far exceeding growth in the domestic market. And S&S is not the only company to report stronger growth in foreign markets than at home.

Negroponte noted that since 1991, MHC has grown twice as fast in the international market as domestically, and the company expects that pattern to continue. In 1996, MHC had foreign sales of $450 million, which contributed nearly 15% to total company sales. Within the educational and professional group, the professional publishing division operates 23 international publishing centers, either directly or through co-publishing arrangements. Among its largest overseas operations are McGraw-Hill Interamericana, McGraw-Hill Europe, Tata McGraw-Hill and McGraw-Hill Ryerson. The centers produce titles in 16 languages, and MHC considers itself to be one of the largest educational publishers of Spanish-language materials. Typically, international markets account for nearly two-thirds of the professional publishing group's sales.

John Wiley is another publisher that expects its international sales to grow at a faster rate than its domestic revenues. Wiley is one of the most internationally-oriented companies in the U.S. In fiscal 1997, 48% of its total sales of $431 million came from overseas. It considers its June 1996 purchase of the German publisher VCH Verlag a "landmark" acquisition that positions it for additional expansion abroad. One reason Wiley has succeeded internationally is that the areas it publishes in, such as science, engineering and business, travel well abroad, company chief operating officer Will Pesce notes. S&S's Maleska says that his company is testing the traditional wisdom that American elhi materials don't travel well, adapting. school product in math and science that have met with success in foreign markets.

To reach the international market, the large American publishers typically adopt a multi-pronged approach. John Wiley, for example, has companies in the U.K., Canada, Australia and Singapore that it uses to maximize sales of English-language publications. Wiley also d s selective indigenous publishing projects, while continuing to sell rights and do co-publishing deals to reach non-English speaking countries. At S&S, Maleska says that the company is adapting to the demands of developing countries for more local product by adopting a "local, local" strategy. In this approach, S&S will tailor its core U.S. product to meet the needs of a particular customer, either through translations or by giving a book a more local perspective.Another American publisher with substantial overseas operations is Harcourt Brace, which established Harcourt Brace Publishers International in London in 1995 under the direction of Timothy Hailstone. The company made a major addition to its operations in mid-1997 when it acquired Churchill Livingstone from Pearson. According to HB, the Churchill purchase "rounds out our international capability, particularly in medicine." Hailstone says that for the fiscal year ended October 31, 1997, the international unit had double digit growth in both revenues and profits.

Not All Smooth Sailing

While American publishers see the international market as an avenue for growth, it is not without some obstacles, and the main problems facing all publishers today are the Asian currency crisis and international protection of intellectual property. And while technology is helping to spur global growth it is also contributing to the breakdown of traditional publishing practices, particularly as it pertains to territorial rights. "The disappearance of international borders will have significant ramifications for U.S. publishing," one industry observer tells PW.

The Internet is a major factor in bringing down international barriers, whether through the sale of a book by an American online bookseller to a customer abroad, or the delivery of information over the Internet to customers anywhere in the world. It is no surprise, then, that copyright protection is a major concern for American publishers, and that the Association of American Publishers and its president Pat Schr der have been leading the charge for Congress to approve the WIPO treaties (see sidebar).

While Wiley is in favor of making information as accessible as possible, Pesce warns that the "protection of intellectual property rights remains one of the critical challenges in the rapidly emerging digital world." Brian Davies, president of Random House International, says he sees no simple solution to the copyright problem. He says publishers may need to develop computer systems that can better track sales, but wonders if, in the end, such a system would be cost effective.

To help examine the issue of copyright protection, online bookselling and the question of rights, the AAP is looking to create a special task force, although at press time the association was still attempting to find members for the force.

Territorial rights is a problem that needs to be addressed quickly, according to John Lyon, vice-president and managing director of international sales for the Time Warner trade group. Not only are online booksellers blurring the lines of rights ownership, but the expansion of American booksellers abroad raises rights issues as well. For example, the Borders store in Singapore is being served by both American and U.K. publishers. And there is a growing sense among publishers that Australia could very well become an open market before too long.

News that Borders is planning to enter that country in 1998 "could be the straw that breaks the camel's back" in terms of Australia remaining an exclusive U.K. territory, one industry observer notes. Lyon says he thinks it is important that the U.K. publishing industry remain strong and is willing to concede exclusivity in its historic regions, but he insists that the rest of the world remain open. Lyon is critical of American editors who acquire rights and then "give away Europe."

Scholastic' s Dick Robinson says that while territorial rights may be an issue now and may create uncertainties in the near term, he thinks it will become less so as the major publishers "become world publishers and acquire world rights to most major books." A veteran international publisher offered a more extreme view, predicting that "the next couple of years will probably see the biggest change in territorial rights since the world was carved up by the Brits and Yanks after World War II. By the turn of the century, the world will be an open market for English-language publishing, with only the U.K. and the U.S. and Canada as exclusive markets."

Because of its strong distribution capabilities, Scholastic has one of the largest international operations among trade publishers. International sales grew 60% from fiscal 1994 to $179 million in fiscal '97, with sales growing 20% in fiscal '97 alone. Scholastic was one of the first American trade publisher to move overseas, because it entered a country to set up a distribution system and "became part of the school fabric in the country where we where located," Robinson says. In the international market, Scholastic plays to its strengths, with some 90% of revenues generated by children's books.

Random House's Davies said 1997 was "a tough year. We got the results we wanted, but we had to fight every inch of the way." In addition to the fourth-quarter meltdown in Asia, Random saw heavy returns from Australia. "Australia is suffering at retail, so the entrance of Borders is probably a positive thing," Davies says. Borders will create an increased need for titles, something that could help U.S. publishers, Davies suggests. Nevertheless, he d s not think that business "will get any easier in 1998."

In interviews with publishers it is clear that the rocky economic situation in Asia will dominate the attention of both trade and educational/professional publishers for at least the first half of 1998. Harcourt's Hailstone says, and many of his colleagues agree, that the major focus of publishers in Asia in early 1998 "will be trying to get paid." Fortunately, many American publishers have long-established relationships with their Asian partners, and are fairly confident that payment will be forthcoming. Nonetheless, most publishers see little new business coming from Asia in the first half of 1998.

"We'll have to tackle the market differently in '98," Davies says, noting that Random is hoping that some signs of recovery may occur by the end of the first quarter. Even if the economies stabilize, however, it is likely that the dollar will be extremely strong against nearly all the Asian countries currencies. Another Davies, Alun, president and publisher of Bantam Doubleday Dell's international division rattled off a litany of depressed currencies. Near the end of 1997 the value of Indonesia's currency against the dollar had fallen by 45%, South Korea's currency was off 42% and Thailand was down 38%. At such exchange rates, it will make the sale of American books extremely difficult, and exports will suffer, publishers agree.

Wiley's Pesce highlighted another potential problem that the strong dollar could mean in Asia: a return to widespread book piracy as prices soar for legally copyrighted books. Pesce's remarks were ech d by an expert on the Asian market who predicts that the "prices of academic textbooks are likely to be out of the reach of the majority of Asian students, while discretionary sales of professional and trade books can also be expected to suffer as a result of the reduced purchasing power of libraries, institutions and individuals."

Robinson was a little less concerned with the problems in Asia than some of his colleagues, though such problems have led to some Asian publishers canceling contracts that were just recently signed at the Frankfurt Book Fair. The problems in Asia "won't last forever. The market will come back," Robinson says. Wiley's Pesce tells PW that "although we are concerned about the recent volatility in the Asian markets, we believe this represents a short-term correction in our business. We've gained significant market share in this region during the past few years, with strong double-digit revenues increases. Although the growth rate will moderate in the short term we remain committed to Asia."

For S&S's Maleska, the biggest problem in Asia is the "currency chaos." He said the volatility of the various currencies is the worst possible scenario because it forces a customer to make another decision on when to buy a book. A stable currency, either at a high or low exchange rate, at least lends some certainty to prices, Maleska says. Currently, the Asian market "is less robust than it could be," Maleska acknowledges. Strong demand for its medical, business and science textbooks resulted in increased sales for MHC in 1997 and Terry McGraw thinks the company will see some more growth in the Pacific Rim in 1998.

With the problems in Asia, as well as with a weak retail market in Canada, BDD's Davies thinks 1998 could be "the toughest year BDD will face [in the international market] for a long time." Like some of his colleagues, Davies says that the news of Borders going international "is a silver lining in the clouds of currency problems." Davies also sees BDD's U.K. affiliate, Transworld, having a strong year in Europe. Indeed, nearly every publisher PW spoke with, on both the trade and professional/education side, is expecting higher sales in Europe to help offset some of the negative effects in Asia. Hailstone says Europe will be Harcourt's largest foreign market, and that the continent has "more room for growth than the U.S."

Latin America was seen as another area that will provide growth opportunities abroad in 1998. Regarding the region, Robinson notes that "everyone will want to become a Spanish publisher. Spanish is a world language." Random's Davies said his company has done well in Latin America in recent years, especially since the Mexican economy has recovered. Hailstone called Latin America "a coming market."

Perhaps the country that provides the greatest intrigue for publishers is India, which to date has avoided the economic problems of Asia. Indeed, one Asia-based agent observes that "the thought that India might also be dragged in [to Asia's economic problems] is too horrible to contemplate." For the time being, however, publishers are increasing their presence in India. Robinson is excited about the possibilities there, and Scholastic has seen strong growth in its Indian book clubs and book fairs. He attributes the good response to a rising middle class in India that has a high regard for education. In looking to expand into other countries, Robinson says a key criterion the company will use is the strength of the middle class.

Brian Davies says Random is also expecting to see growth in India. He points out that the size of the Indian middle class that speaks English is roughly equivalent to the population of Australia. The lack of effective retailing, however, could hold down sales, Davies says. Time Warner's Lyon is also bullish on prospects in India, predicting that "I'm sure I won't be the only American publisher at the New Delhi Book Fair."

And finally there is China. Random's Davies says he is beginning to see some positive signs coming from the Chinese government about their willingness to work with American publishers, especially on the distribution side. S&S already has eight people in a Beijing office and expects to open an office in Shanghai in August. According to Maleska, the company has received a good response to its computer and English-training books, and he adds that in only a short period of time S&S has built a profitable Chinese operation.

The economic upheaval in Asia is likely to slow down American publishers' drive into the international market, but it will not stop it. U.S. publishers own the largest amount of content in the world and are in the best position to take advantage of the technological advances that will make disseminating material abroad easier than ever. Although the international arena will always offer a series of challenges-such as copyright protection, changes in territorial rights and a region that develops unexpected economic problems-in the end, the opportunities overseas are too great for American publishers to pass up.
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