Pottermore Breaking, Bracing, or Booming?

So I'm certain many of you have heard this sort of headline already.

Pottermore has posted a loss. It's been a while, but they've posted a loss. Of nearly five million pounds.

Now, it's difficult to go over, but luckily, I have a fairly strong business background, and some basic skill in reading balance sheets.

I will mention, however, and stress that the numbers only tell a part of the story, and there's still plenty of pieces of the puzzle missing.

As for how I got this information, it's publicly available here.

So before we go deeper in to the rabbit hole a brief explanation on balance sheets, corporations, and how businesses work.

Businesses exist (generally) to make money. They are born from a government and people agreeing that it's okay for the people to work together to get more money by pooling resources. From there, there are three groups of people we think about, Officers, Directors, and Shareholders. Depending on what type of business you are, you may or may not have them. Shareholders generally own a company, while directors and officers run it to varying degrees.

Directors are elected by shareholders, and make big decisions on what to do. Like massive. If they want to branch into a new market that's probably the directors saying that. They may or may not be paid much, and they vote on what to do, and who to hire as an officer. Officers handle more of the day to day stuff (though even they delegate tasks off to other people).

From this, we know the following about Pottermore, Circa March, 2015.

They have one share of stock owned by former CEO Neil Blair. (Neil is also Jo's literary agent. Also, that one share is worth 1 pound.)

Neil and two other people (who all work for the Blair Partnership) are directors of Pottermore.

The "ultimate controlling party" is designated as JK Rowling. (I should note that after a brief, and unhelpful web search, it designated an ultimate controlling party as someone that can tell the majority shareholder what to do due to somehow owning them in some fashion, I'd guess this would qualify as she may be able to force Neil to do what she wants, or this is done as part of his duties to her, but I am still fairly uncertain. Just remember: it means she gets last say and can boss them around if she's so inclined.)

Pottermore pays two companies, one that is owned by Rowling (for which Neil helps with) and another which is the Blair partnership.

From this, here's the sort of "gist" of Pottermore info. When you purchase shares, that's the amount of money you're personally liable for in the company. So if you spend a dollar on a share, and the company goes belly up. You only lose a dollar. And when the company's creditors come calling? They have to shout to the company, and they can't go after your nice things. (Conversely, if you were a "sole proprietor" and the company went belly up, you could lose everything you have to your name.)

Now, the way this essentially sets Pottermore up, is every some odd months, Pottermore shills out money to the Blair partnership, and to JKR's company. And theoretically they pay the directors too.

So bluntly, Pottermore acts sort of like an ATM for Blair, his friends, and Queen Jo. Every some odd months, they get their checks, and they're happy. They don't have to do much with Pottermore to get that, but they have an interest in not bleeding it dry.

Now, for the financials. To keep it simple, turnover is their sales. So first note is that sales dropped drastically, from about 30 million in 2014 to 7 million in 2015. Making this worse, it cost them 7 million this year (11 million last year) to sell all of those, and about another 6 million in administrative costs. (Fun fact: while pottermore's staff went down by 10 people this year, it actually costed more for employees this year than the last one they posted).

Now this trickled down and after a very generous tax break, and some interest, they cut their 6 million down to just shy of 5 million. This 5 million loss, is compared to a 11 million profit last year.

So you must be asking yourself, "Will pottermore die? This is a pretty bad hit to take!" And you are right, this is a pretty rough shove for any company, but it doesn't seem particularly unhealthy. They took a (technical) loss last year decreasing the retained earnings (money left over for paying them) in 2013, and I honestly am not too surprised given they've leveraged most of their risk onto debt, so they borrowed money to put in, instead of putting it in themselves.

The moral of this story is essentially, Pottermore has managed to fashion itself to be a fairly risk-less money machine for Rowling and her agents. I'm uncertain to the specificity of british corporate or business law, but there are some parts that seem to not *quite* jive with me (like the one shareholder, with three people that work for the place that they rent their offices from) but it's generally interesting.

As to why Pottermore's sales have gone down, there are a few guesses, though none are hinted at. It could be that the sales of the wonder book stuff with sony had died down, or ceased, or it could be that the sales of ebooks crashed, or that they simply made a lot of poor decisions. Note that this is before the closure, and it will be approximately two and a half months till we see the next filing, so there's not much to show for that.

However, given what we do know, it is possible that either Pottermore's sony partnership was worth much more than we gave credit for, or that Pottermore's business model was on the whole, unsustainable.

Sooooo before we delve in, a final fun fact.

Pottermore, the trademark, is owned by Warner Brothers. Yah. Hard to imagine (no, not really you say). They've owned the trademark since before the site's inception, and there is nothing to signal that they have transferred the trademark to Pottermore Limited (the company).

With that being said... I'm certain the goblins of gringotts have a word or two in advice for Neil and his directors, and the blame can be shifted to a great many people, though we can't be sure who or what yet, and as bad as it may seem for those that wish to shout "I TOLD YOU SO" about the recent decisions, it's difficult to see the ramifications till the next filing is announced on March 31, 2016.

If you're interested in hearing the rundown on that one, let me know.

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