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CARADOC KING, a literary agent with the large London firm of AP Watt, was chatting to Transworld Publishers editor Ursula Mackenzie at a cocktail party last September when he casually asked: "Do you like horses?''

He told her he was about to auction a half-completed book by Nicholas Evans, a new author, called The Horse Whisperer. On the face of it, the book was not an enticing proposition. Evans had never written a novel before. He was a film producer by trade. The Horse Whisperer was not even finished.

But Ms Mackenzie was intrigued. The book told the tale of a 13-year-old girl and her horse who were injured in a car accident. The horse goes crazy, and only the murmurings of an expert horse tamer can help it and the girl to recover.

Twelve months later, before the books are even in the UK bookshops, Evans is a rich man. Following a heated auction, Ms Mackenzie and Trans- world, a Bertelsmann company, agreed to pay him pounds 357,500 for British and Commonwealth rights. The bidding had shot up after the film rights were sold to Robert Redford's production company, Hollywood Pictures, for $3m (pounds 1.9m). Shortly afterwards, Delacourt Dell, Trans- world's sister company in America, paid $3.15m for the American book rights. In total, Evans was in line for more than pounds 4.2m.

Evans is not alone. In fact there is hardly a British publishing house which has not recently paid an advance in excess of pounds 100,000 for an unknown author. It has been practice for years to pay large advances to established authors. We have all heard about the pounds 500,000 advance paid to Martin Amis for his latest novel and a collection of short stories. But complete unknowns?

What is happening is that publishers are trying to replicate the success Random House had with John Grisham, the author of books such as The Firm and Pelican Brief. Six years ago, no-one had heard of Grisham. Transworld balked at paying more than pounds 70,000 in the UK for The Firm when it was auctioned. It was a decision it has lived to regret. Last year, Random House sold more than 1.1 million copies of Grisham's The Client, making it the best-selling paperback book published during 1994. The publisher also sold more than 400,000 copies of the special paperback version of Pelican Brief, which was released to tie in with the film starring Julia Roberts.

In spite of losing Grisham, Transworld has managed to establish itself as one of the publishers with the best track records for new blockbuster fiction. According to a survey in the Bookseller, the publishing industry magazine, retail sales during 1994 of Transworld's new paperback blockbusters - books published in 1994 with sales in excess of 100,000 copies - rose to pounds 30.6m, making it the market leader in Britain. Even a pasting by the reviewers does not seem to hurt. Although The Horse Whisperer has had scathing reviews in America it has already become Number Three in the best-seller lists.

Vikram Seth's A Suitable Boy, which Orion published in 1993, is another example. His only previous novel had been a work in verse. Yet Orion managing director Peter Roche made what he called a "heart throbbing'' decision to wave through a massive pounds 250,000 advance for British and Commonwealth rights to his first attempt at a blockbuster.

The sales have lived up to Orion's expectations. The advance has been more than recouped from the pounds 9.99 paperback version alone, which sold more than 350,000 copies. Unusually for this kind of fiction, the hardback version sold 75,000 copies. Sales will rise still further after Orion issues a new three-volume mass-market paperback edition at the end of this month. Most of the other books listed in the table are also likely to become bestsellers. Alan Folson is another author of whom no-one had heard before the US publisher Little Brown paid him pounds 250,000 for The Day After Tomorrow. Little Brown has managed to sell 365,000 copies of the paperback.

The 44,000 hardback sales made by Michael Ridpath's first novel Free To Trade suggests that it will also earn back the pounds 125,000 advance that he was paid, once the paperback goes into the bookshops next year. A commonly used rule of thumb in the publishing industry says that paperback sales are usually more than seven times as large as the hardback sales.

While some of the high-advance books are in the "sex-and-shopping" genre, there has been a trend towards more literary thrillers or drama. Post Grisham, publishers have decided that you do not need to play to the lowest common denominator to make a fortune.

How is it that they have such a high hit rate? Is it enough for a pounds 100,000 advance to be paid and publicised? In other words, is it just a matter of self-fulfilling hype?

Transworld's Ms Mackenzie says that hype is certainly an important factor as long as it is justified by what is between the book covers. "Often it is hard to sell an unknown author to the public unless you have talked about the money or the film deal in the media.''

But according to Clare Alexander, Viking's publishing director, it would be couped this - at 60p a book - after exactly 200,000 copies have been sold. After that, it starts handing over royalties rather than just setting them against the advance.

If fewer than 200,000 copies are sold altogether, however, the publisher is left with an unrecouped royalty that has to be charged against the overall balance sheet. This will reduce its profit, and if the shortfall is too great it will wipe it out.

In reality, the arithmetic is even more complex. These sums do not, for example, include the cost of publishing the book in hardback, which normally makes a loss.

Mark Barty-King, the managing director of Transworld, faces an awesome task when The Horse Whisperer appears on the bookshelves. He is hoping that Transworld will manage to sell at least 75,000 to 100,000 hardback copies and 500,000 to 1 million paperback copies during the three years after publication.

This would ensure that Nicholas Evans' advance is recouped and that Transworld makes a minimum of pounds 180,000 of profit on the book.

But Mr Barty King says that he would have paid out the pounds 357,500 advance even if he feared that The Horse Whisperer would not result in a profit after taking into account all overhead costs.

"The important points are first that it should make a significant contribution to overhead costs.

"Secondly, it has enabled us to make a relationship with Nicholas Evans and, provided that we do a good job with The Horse Whisperer, we will be able to capitalise on his increasing success with future books."

In other words, publishers paying out these huge advances are prepared to think long term in the hope that they hit the jackpot.

But as a result of tying up such large sums, publishers are having to cut back the number of titles they publish each year.

In the new world of fiction, authors who in the past may have made a modest living are now having to stick to their day jobs - either that, or come up with an idea that sends publishers scurrying for their calculators. UNKNOWN AUTHORS, BIG ADVANCES

Title, author, publisher Advance for UK and Hardback sales/ Paperback sales/

Commonwealth rights publication date publication date

The Horse Whisperer pounds 357,500 10/95

Nicholas Evans,Transworld

Absolute Power pounds 320,000 6/96

David Baldacci, Simon & Schuster

The Juror pounds 275,000 26,000

George Dawes Green, Transworld 3/95

The Day After Tomorrow pounds 250,000 25,000 365,000

Alan Folson, Little Brown 5/94 5/95

A Suitable Boy 250,000 75,000 375,000

Vikram Seth, Orion 3/93 3/94

Free To Trade pounds 125,000 (two books 44,000

Michael Ridpath, Heinemann for pounds 250,000 deal) 1/95

Night Shall Overtake Us pounds 100,000 15,000 90,000

Kate Saunders, Random House 5/93 3/94

hard to get away with making too many overblown claims for bad books to the book trade. "They are all logged on to computers and can see how publishers' predictions have worked in the past. Getting the books well displayed in their bookshops is three quarters of the battle.''

Simon & Schuster's marketing director Bob Kelly, who is in the process of finalising his strategy prior to the publication of The Christmas Box by Richard Paul Evans at the end of this month, says you can buy space on store shelves. Simon & Schuster has agreed to pay Richard Paul Evans pounds 250,000 for the book and its prequel, even though no-one in Britain has ever heard of the author.

To get round this problem Mr Kelly is using part of his pounds 50,000 publicity budget to pay for it to appear in book catalogues produced by shops such as WH Smith and Dillons. In return, he knows that these stores will give the book good displays within their shops.

However, even he admits there is no guarantee of success in spite of all the in-store publicity material and magazine advertisements he has lined up. The best marketing ploy will be to rely on the story of how Simon & Schuster paid such large amounts of money for a book which was just 87 pages long when it was first published by Richard Paul Evans himself in America. He could not find an American publisher until his own edition hit the bestseller lists at the end of last year.

High advances undoubtedly generate publicity. But do they lift sales sufficiently to enable the publisher to make a profit? A typical 400-page paperback blockbuster novel retails at pounds 5.99. Very roughly, the retailer and wholesaler take about pounds 3.40, leaving about pounds 2.60 for the publisher. At a circulation of 200,000, the publisher has to pay 30p per book for printing, paper, binding and origination costs, 60p for the author's royalty, 20p for advertising, freight and packaging, and about 60p to cover overheads. A further 50p also has to be deducted to allow for the fact that 20 per cent of books sold are returned. That leaves a profit of about 40p per book.

How does the advance fit into this equation? Say the author has been paid pounds 120,000. The publisher will have re-