Does Mr Big really know what we want to read?

The literati's favourite bookshop is going downmarket. But if supermarkets can sell Harry Potter che

The most powerful man in the literary world is not the chairman of the Man Booker jury who hands out the prizes. Nor is it a great novelist who sets the intellectual fashion. It is a bull-necked, shaven-headed former pop music salesman who cares little for literary London. The feeling is reciprocated in spades. Literary London fears Scott Pack.

"The trade is completely out of balance," said a leading agent. "Authors and publishers are being pummelled."

"We call him 'Pot Snack'," said another, "because he's so cheap and tasteless." The publishing world whispers the insults from behind the coward's cloak of anonymity. No one wants to offend Pack. He is too powerful.

Scott Pack is Waterstone's buying manager. Until five years ago, a man in his position would have been smothered in air kisses. The chain store had managed the seemingly impossible task of combining the efficiencies of scale of a conglomerate with the specialised service you might expect from a small shop. That is all going. Power has been centralised in the hands of Pack and his executives, and to hear his critics talk, you would think they had turned Waterstone's into a monopoly as ruthless as Microsoft, or at least Tesco. On paper, they are wrong. Waterstone's controls only 14.7 per cent of the market from its 200 shops. It's big, but not monstrously so.

Pack dismisses the notion that he is the Napoleon of the book trade. "I have been described in press articles as 'uber-powerful' and 'the man who can make or break a book'," he wrote in his column in the trade's Bookseller magazine. "The idea that one person can wield such influence on the success, or otherwise, of an author's work is clearly nonsense."

Pack's modesty and the bald sales figures do not tell the whole story, however. How powerful you think he is depends on where you stand and what you read. Waterstone's, along with those upmarket independent booksellers that survived the abolition of price controls in 1997, are the main retailers of literary fiction and serious non-fiction. I would guess that any book reviewed in the New Statesman over the past two decades would have had to be given a chance by Waterstone's if it was going to stand a chance of breaking even. If, by a stroke of magnificent fortune, Waterstone's staff decided that they loved it, their enthusiasm could turn an apparently obscure work into a hit. One publisher told me that Nick Hornby, Louis de Bernieres and Sebastian Faulks owed their transition from fringe to mainstream to Waterstone's persuading customers that their books were worth a try. From the point of view of serious authors, readers and publishers, Waterstone's is Microsoft. The trouble is that its equivalent of Bill Gates has decided he wants new software.

A decade ago the Booker longlist would not have surprised Waterstone's regulars. They would have expected the shop's staff to have spotted most good new novels and put them on display. Small chance of that today. Even if a book makes the longlist, there is no guarantee that Waterstone's will promote it.

As Pack explained a few days before this year's Man Booker list was published, airy-fairy literary prizes do not impress him. He was expecting his phone to be hot with publishers asking him if he wanted to buy more copies of their longlisted book. "I don't want to rain on anyone's parade - getting longlisted for the Man Booker Prize is rightly an exciting event for author and publisher alike - but our answer is almost certainly a 'no' . . . The one thing it does not do is sell books. Not many anyway. I make no apologies for that statement. I am here to give the retailer's perspective, after all."

If it is a retailer's perspective, it's an odd one. Traditional shopkeepers thought it was their job to do the selling. But, as Pack makes clear, there is nothing old-fashioned about him. He came to Waterstone's from HMV and still dresses like an ageing rocker. If you put yourself in his trainers, you can see how he might imagine his firm was heading for trouble. Borders is doing what Waterstone's used to do, but often on a larger scale. Amazon offers every book in print and, through its links with second-hand booksellers, many which are out of print as well. The vulnerable competitor is W H Smith. Waterstone's is putting on pressure.

Look at the displays in the two shops rather than the shelves and you will be hard-pressed to tell the difference. You'll see J K Rowling, Gillian McKeith, Jeremy Clarkson and, of course, Dan Brown: Dan Brown's new book; Dan Brown's old books; and books about Dan Brown books. Waterstone's is going downmarket and doing what everyone else does. As a result, the next generation of serious writers will find it harder to reach an audience.

In the modern entertainment industry, what matters is not a shopkeeper's skill but the free publicity he gets from hype: advertising campaigns by big publishers and drooling "advertorial" puffs in the press and on television. In the same column in which he dismissed the Man Booker, Pack was full of praise for Richard and Judy's Book Club on daytime television. That worked. That could "energise Middle England in its tens of thousands". The broadsheet critics, by contrast, were useless literati. The Saturday and Sunday books pages left him "thoroughly depressed", he recently confessed. Literary editors were turning "what should be a force for good in our industry into a complete waste of time". They would let a "largely forgotten academic with an unfeasible beard" ramble on about a biography while not giving "chick lit" the space it deserved. Richard and Judy brought the punters through the door; "reviews no longer sell books in the volume that they used to".

With this attitude at the top, it is natural that Waterstone's should turn the screws on the publishers and, by extension, their authors. It operates a "sale or return" policy. If a book doesn't sell, it is sent back to the publisher, which loses the money from the order and has to pick up the bill for the failure of Waterstone's buyers to know their market. Publishers also have to pay if they want a book to get a prime place on the front tables or in the shop's summer or Christmas catalogues.

Waterstone's won't promote a book it thinks is worthless. None the less, publishers and authors pay towards the retailer's promotional costs. Meanwhile Waterstone's has curtailed the power of branch managers to get behind a quirky book that takes their fancy. Its buying guidelines emphasise that books which haven't got the approval of head office should be ordered only one or two at a time. The result is that it is harder to find anything other than recent titles. Even the early works of big authors such as Ian McEwan or Martin Amis will not necessarily be in stock. If they don't turn over quickly, they are returned.

Listening to Pack's incandescent critics, I couldn't help feeling sympathy for him. Anyone who has heard the herd of editors, publishers, authors and critics mooing their political and cultural cliches at a London literary party and not felt the urge to reach for a baseball bat is less than human. Tesco would ask a supplier to support a promotion; why shouldn't Waterstone's? As for serious books, if they don't sell, how can he justify stocking them?

But more thoughtful critics of Waterstone's worry that the company will fail on its own terms. It is easy for the managers of elite institutions to embrace populism and dismiss their critics as big girls' blouses who know nothing of the market, and tempting, too. Whether you are running the BBC, the Times, the Royal Opera House, the British Museum or Waterstone's, however, the danger is losing the existing audience without finding a new one. For Waterstone's, the danger is clear. Tesco and Asda showed with the most recent Harry Potter book that they could beat any price cut Waterstone's could offer. If the company falters, Ottakar's is ready to take its place. The chain's friendly and knowledgeable staff already remind customers of Waterstone's in its glory days.

There is a second danger. Books, magazines and newspapers are exempt from VAT because they allegedly aid the transmission of knowledge. If even the managers of upmarket book chains insist that they are a business like any other, why shouldn't Gordon Brown take them at their word and slap VAT on the lot of them?

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