A Great British Institution is in peril. Jan Dalley reports on the problems at Penguin Books

Penguin is in trouble. The famous bird, a symbol as apparently solid and timeless and central to our cultural life as the Times, the BBC and the Church of England, is looking distinctly bedraggled about the plumage. The business pages of the nationals and the publishing trade press have been full of it: jobs are being cut; titles will be axed. An American whizz kid has been imported to rally the old bird's fortunes.

This week's news? Well, yes, but also the news of 1978. It's easy to forget that in that year, too, Penguin Books was in a sorry state, its high status undermined by dwindling sales. And in 1978 it was the young American Peter Mayer who was brought in as Chief Executive to save the day, running the worldwide operation from London.

Two decades later, the sound of chopping is heard again at Penguin UK. Mayer retired last December, having overseen the appointment of his successor - Michael Lynton, 36, a young American brought in to save the day. Jobs are being cut; titles will be axed. How history repeats itself.

Lynton has got his work cut out: added to the British job losses comes the devastating news from America that pounds 100m appears to have gone astray at Penguin USA. Yet only 10 years ago, at the mid-point of Mayer's reign, the British company was flying high in terms of financial results, with its intellectual status intact. So how, we may wonder, has this cycle of success and decline come round?

The decline of the 1970s now seems easy to anatomise - although it must have been baffling at the time. When Allen Lane established Penguin in 1935, he effectively revolutionised publishing with the famous Sixpenny Editions: excellent books, both innovatory and classic, at a price everyone could afford. It was a unique proposition, a marriage of social commitment and commercial acumen that was both benign and shrewd. A kind of Reithian idealism, in fact, which mirrored that of the early days of the BBC. (Some parallels have remained: ex-employees draw likenesses between the cuts, reorganisations and persistent uncertainty of late-Mayer Penguin and those of John Birt's BBC.)

Those Reithian values held sway for 30 or 40 years in many walks of British life - and certainly in our self-image. It was, for a brief moment, a time when the British did not despise everything brainy and foreign: astonishing to think that one of the first titles Penguin chose to publish was Andre Maurois's Ariel - just as one of the first items broadcast at the birth of the BBC's Third Programme was an interview with Matisse, in French. For Penguin, the winning formula was devised with the first batch of titles, which still seems even now like a publisher's wish-list. Besides Maurois (classy, intellectual, foreign), there was Agatha Christie (classy but mass- market), Ernest Hemingway (literary but accessible), Eric Linklater (honest- to-goodness home-grown talent), Dorothy L Sayers (Oxbridge dons' darling) and others: a range that ensured both kudos and profitability.

Over the years, it also ensured Penguin a special place in our hearts, and minds, and wallets. The colour-coded Penguin spines - the orange contemporary lit, the black classics, the green crime - entered the consciousness of successive generations as emblems of a world of accessible wonders, wide and challenging but as reassuring as Ovaltine or Startrite. The brand identity, as it would later be called, was total.

The hard truth is, however, that the cultural organisations which flowered in this heady post-war atmosphere and on into the affluent Sixties did so at least partly because there was very little commercial competition. As soon as competitive pressures began to bite - in the guise of Pan paperbacks, for instance, to confront Penguin, or independent television channels to challenge the BBC - they lost market share and began to fall victim to the long-term clash of cultures (the tug-of-war between idealistic tradition and naked commerce) that still bedevils them and clouds their sense of direction. It is perhaps interesting that 1978, a low point for Penguin, was also a year when the pre-Murdoch, deeply Establishment Times was - unthinkably - in trouble. It was the year before Margaret Thatcher was elected. It now seems like the end of an age.

But Peter Mayer's appointment in 1978 as Emperor Penguin heralded a brave new era for the failing company. Although his American management style may have run contrary to the old ideals, his zealous commitment to literature won him support. Lavish tributes are paid to him, even by distressed ex-Penguins who have slithered, slid or jumped off the ice-floe recently (and let's not forget that, before the tough cuts of the last few weeks, there were about 100 redundancies in the UK division alone during 1995 and 1996). "A sort of genius," they call him; "a visionary, intuitive publisher"; "the kind of person you'd do anything to please"; "an inspirational leader".

There were immediate flourishes: Mayer put pictures - pictures - on the Penguin covers, and showed his business acumen in two or three bold strokes. He laid the foundations for future financial security when he bought Frederick Warne, an apparently insignificant little company which owned the Beatrix Potter books and their illustrations, and remains to this day the goose that lays Penguin's golden eggs. Potter and her spin-off merchandising generate enough profits to shore up the whole edifice. It was a brilliant move, but possibly one that backfired a little in later years: like having a rich daddy to pay the bills, it perhaps veiled the reality that the front-list publishing was not all it might be. Later, and in sadder mood, some ex-Penguins felt the process of attrition that led to recent changes was obscured by this false sense of security: "It was dysfunctional, but we couldn't see it."

Mayer foresaw the trend towards "vertical" publishing (ie when the same company publishes both hardback and paperback) and realised that Penguin must generate its own hardback material, not just buy in paperback rights from others. He revamped the old Allen Lane imprint as Viking, a hardback list, and, in another big move in 1985, acquired part of the Thomson group, bringing in Michael Joseph, Hamish Hamilton and Sphere, thus creating the cluster of companies that exists today. He had appointed Peter Carson as editorial supremo, and the two Peters made, according to one ex-Penguin, "a magic combination: the mad enthusiast and the cynical intellectual. It worked brilliantly."

By the time of Penguin's 50th anniversary celebrations in 1985, the company was not only rescued but in fine form, profitable and confident. A book published to celebrate the anniversary describes an editorial team of 12 to 15 editors in Viking/Penguin alone: for the last year there have been two and a half. Editors talk of that time as a golden age of creative publishing. Mayer had worked his magic.

So what went wrong? Why did Mayer's second decade at Penguin see a decline as rapid as the rise in his first? The answer seems to be two-fold: Mayer went away, and publishing changed.

By 1987, the American division of Penguin was in disarray, and Mayer went home to sort things out, shifting his base from the UK to the US. He remained in overall control in Britain, but he was only here for a few days each month and, as one source put it, "the weight of the company moved to America". He'd appointed as UK managing director Trevor Glover, who had had a successful 10 years at Penguin Australia but who was never seen as a real successor to Mayer. Although there is sympathy for Glover (Mayer was a very hard act to follow, and anyway he hadn't relinquished control), it is difficult to elicit a flattering remark about him: a "yes- man," one ex-staffer called him; a man "paralysed by indecision," said another.

Is there a word for it - the syndrome by which highly charismatic and individual leaders cannot appoint an heir to match them? If so, it seems to have a place in this story.

A number of significant changes took place in paperback publishing. There was an enormous increase in the number of rival paperback lists, the most significant of which (from Penguin's point of view) was Picador. And the growth of "vertical" publishing changed the whole basis of paperbacking. Until about 15 years ago it was common for a hardback house to publish a book in hardback, then sell it on to a paperback house (such as Penguin) for the best price available. Penguin would then publish the book on licence from the hardbacker, a licence that was renewable, at a price, every five to eight years.

But gradually publishers started to want the lower-risk, higher-profit paperback sales for themselves. The newly conglomerated groups such as Random House, whose old-established companies (Jonathan Cape and Chatto & Windus) had generated in hardback many of the great originals that ended up as orange Penguins, decided to start up their own paperback lists (Vintage and Pimlico, in this case). The result was that not only did the supply of material for paperbacking dry up, but many licences, when they came up for renewal, were snatched back by the original publishers - so Penguin was actually losing authors, or having to pay an uneconomically high price to keep them.

This was obviously a huge crisis for a traditional paperback house - but Mayer had foreseen it, and in the acquisition of Michael Joseph and Hamish Hamilton, and the creation of Viking, had provided Penguin with in-house hardback originators. Still, it wasn't the same.

"Somehow, I never felt the company was committed to the hardback side," one ex-editor said. "They felt paperbacks were where the profits were." And when downsizing came to Penguin, as to everyone else in the world, "they kept cutting editors. Cuts were made on a percentage basis - if you lost x people in the warehouse you had to lose x from the editorial staff too. That meant that soon there weren't enough editors to keep the quality and variety going, however hard they worked." Others related this to the fact that Trevor Glover's background was in marketing, not editorial work - and felt that he "just didn't understand". Another commentator felt that the company's loss of editors meant "they cut the people who were generating the product that made the whole thing go round". And without Mayer's complementary enthusiasm, some found Peter Carson's more "cynical" approach difficult to work with.

Another wound in the side of the great bird was caused by the Classics price war which began a few years ago. Penguin's Classics had, along with Beatrix Potter, always provided comfortable profits to cushion the more adventurous front-list publishing. But with the arrival in 1992 of Wordsworth Editions, priced at pounds 1 or even less, swiftly copied by others, the fierce competition gave Penguin a hard knock in the bottom line.

Not that Penguin didn't fight back during these troubled years. There were some brilliant stunts: the 60s, mini-books priced at 60p each, and the recent Stephen King part-work were two lucrative examples. But what one former Penguin calls "the soul of Penguin - the orange spine, the living authors, the books we put our weight behind, which should go on to be 20th-century classics" was becoming undernourished.

1995 was annus horribilis, in which almost every month saw the departure or redundancy of a senior member of staff, as well as wholesale cuts throughout the operation. Finally, in October 1995, came Trevor Glover's sudden resignation - but instead of immediately installing an energetic successor, Mayer allowed a long gap until the spring of 1996, when Anthony Forbes- Watson arrived from Ladybird.

By the summer, Mayer himself had taken the decision to retire, and his successor in waiting was named in August as Michael Lynton, president of Hollywood Pictures. These two appointments were obviously alarming for the old guard: Lynton, they believe, is a man for whom management comes first; and Forbes-Watson, according to these same disenchanted old- timers, "speaks only corporate-speak" and has "little feeling for books".

Last year, Forbes-Watson, with an outgoing boss and an incoming boss, was hardly in a strong position to make sweeping changes. However, as soon as Mayer was gone, at the end of December, he acted. He had worked with Helen Fraser at HarperCollins, and last month he appointed her as editor-in-chief of the newly created general division (Viking, Penguin, HH and Michael Joseph), while Peter Carson was made temporary editor- in-chief of the academic and classics division (Penguin Press, Allen Lane, the Classics and Arkana). New structures are being worked out, with the effect of reducing staffing in sales, marketing and other departments: you can call this either "rationalisation" (the official line) or "slash and burn" (an ex-Penguin).

There is a sense of mourning for what is past, and comments like "the final death of the ideal" and "pure commerce has triumphed" show how many of the criticisms are couched in the emotional language of the grief process. But that is inevitable - Penguin was that kind of place.

And what now? For the new regime, simple financial viability may not be the main issue, for despite everything profits for the UK in 1996 are said to be in the range of pounds 9m (though with the recent revelations of misplaced funds in Penguin's US division, the final figures will be anyone's guess). What may be more important is whether this mutilated company can restore its reputation in the eyes of the industry - if not, its power to attract authors will suffer. With the acquisition of Reed's general books by Random House (surely a trick Penguin missed?), the title of Britain's leading publisher must finally have passed from Penguin to Random House. But publishers, like other organisations, go through cycles of change: who now remembers Chapman & Hall, for instance, once mighty publishers and a cultural power in the land?

One thing everyone agrees on is that great publishing houses can only be created by publishers, not apparatchiks. Each of the finest imprints of our century has been shaped by a sensibility, or a group of sensibilities, and there isn't a word for that in corporate-speak.

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