Friday, May 11, 2012

Houghton Mifflin Harcourt to File for Bankruptcy

One of my predictions for 2012 was that one of the major trades would fall prey to bad business decisions based on outmoded operating models and file for bankruptcy protection, and today the Wall Street Journal reports that Houghton Mifflin Harcourt have done just that.

In retrospect this is hardly surprising, given HMH's heavy reliance on the educational market, which has declined by 48% over the past four years, due primarily to cuts in school budgets, but also because of a shift away from printed textbooks to laptops and tablets. In addition, they've been struggling under a capital restructuring plan since January (their second in as many years), with a hefty burden of $3.1 billion dollars in debts that is nearly three times their total gross sales for all of 2011 ($1.3 billion before expenses). And as with all the major trades, HMH has been reluctant to transition into digital, with major list authors like J.R.R. Tolkien only recently becoming available in official ebook editions (just this February for Tolkien, in fact).

Such blundering moves by short-sighted corporate heads are not uncommon, and HMH have made their share. Just four years ago the head of the trade division resigned in protest when the company put a freeze on acquisitions of new titles, a move seen by trade insiders as a monumental blunder when faced with lagging sales. Without new books to offer sales can only stagnate and decline. In 2009, HMH was ranked the 10th worst place to work in America, according to one survey.

In truth, HMH has been operating in debt for over a decade, with new ownership or mergers occurring nearly every year since 2001. But none of the new owners or executives were visionary enough to see the shifting tradewinds, or turn about a ship clearly riding contrary to the current. Whether or not it can ride out the tide will depend on how quickly and effectively they can retool for the new digital medium, particularly with regard to taking on Apple for domination of the educational arena. But big boats turn slowly, and Apple are already heading in the right direction. If HMH simply continue to operate on the business-as-usual model that ship is gonna sink.