How E-book Royalties are Cheating Authors

Yesterday The Authors Guild posted a very interesting analyis about the dynamics of competition between Apple, Amazon, and Barnes and Noble as they jockey for the e-book market. The analysis came down very hard on Amazon.

Today The Authors Guild has published an equally fascinating analysis of how  the prevailing formula for author royalties on e-books  unfairly diminishes authors’ income even as publishers earn more for each e-book sold.  Below is the  text of this analysis.

E-Book Royalty Math: The Big Tilt

 
To mark the one-year anniversary of the Great Blackout, Amazon’s weeklong shut down of e-commerce for nearly all of Macmillan’s titles, we’re sending out a series of alerts this week and next on the state of e-books, authorship, and publishing. The first installment (How Apple Saved Barnes & Noble. Probably.) discussed the outcome, one year later, of that battle. Today, we look at the e-royalty debate, which has been simmering for a while, but is likely to soon heat up as the e-book market grows. 
 
E-book royalty rates for major trade publishers have coalesced, for the moment, at 25% of the publisher’s receipts. As we’ve pointed out previously, this is contrary to longstanding tradition in trade book publishing, in which authors and publishers effectively split the net proceeds of book sales (that’s how the industry arrived at the standard hardcover royalty rate of 15% of  list price). Among the ills of this radical pay cut is the distorting effect it has on publishers’ incentives: publishers generally do significantly better on e-book sales than they do on hardcover sales. Authors, on the other hand, always do worse.
 
How much better for the publisher and how much worse for the author? Here are examples of author’s royalties compared to publisher’s gross profit (income per copy minus expenses per copy), calculated using industry-standard contract terms:  
 
“The Help,” by Kathryn Stockett  
Author’s Standard Royalty: $3.75 hardcover; $2.28 e-book. Author’s E-Loss = -39% 
Publisher’s Margin: $4.75 hardcover; $6.32 e-book. Publisher’s E-Gain = +33%
 
“Hell’s Corner,” by David Baldacci 
Author’s Standard Royalty: $4.20 hardcover; $2.63 e-book. Author’s E-Loss = -37% 
Publisher’s Margin: $5.80 hardcover; $7.37 e-book. Publisher’s E-Gain = +27%
 
“Unbroken,” by Laura Hillenbrand 
Author’s Standard Royalty: $4.05 hardcover; $3.38 e-book. Author’s E-Loss = -17% 
Publisher’s Margin: $5.45 hardcover; $9.62 e-book. Publisher’s E-Gain = +77%
 
So, everything else being equal, publishers will naturally have a strong bias toward e-book sales. It certainly does wonders for cash flow: not only does the publisher net more, but the reduced royalty means that every time an e-book purchase displaces a hardcover purchase, the odds that the author’s advance will earn out — and the publisher will have to cut a check for royalties — diminishes. In more ways than one, the author’s e-loss is the publisher’s e-gain.
 
Inertia, unfortunately, is embedded in the contractual landscape. If the publisher were to offer more equitable e-royalties in new contracts, it would ripple through much of the publisher’s catalog: most major trade publishers have thousands of contracts that require an automatic adjustment or renegotiation of e-book royalties if the publisher starts offering better terms. (Some publishers finesse this issue when they amend older contracts, many of which allow e-royalty rates to quickly escalate to 40% of the publisher’s receipts. Amending old contracts to grant the publisher digital rights doesn’t trigger the automatic adjustment, in the publisher’s view.) Given these substantial collateral costs, publishers will continue to strongly resist changes to their e-book royalties for new books.
 
Resistance, in the long run, will be futile. As the e-book market continues to grow, competitive pressures will almost certainly force publishers to share e-book proceeds fairly. Authors with clout simply won’t put up with junior partner status in an increasingly important market. New publishers are already willing to share fairly. Once one of those publishers has the capital to pay even a handful of authors meaningful advances, or a major trade publisher decides to take the plunge, the tipping point will likely be at hand.
 
In the meantime, what’s to be done? We’ll address that in our next installment in this series, on Monday.
 
Our assumptions and calculations for the figures above follow.
 
——————————————————– 
Doing the Numbers: Hardcover
 
To keep things as simple as possible, we assumed that for hardcovers: (1) the publisher sells at an average 50% discount to the wholesaler or retailer (2) the royalty rate is 15% of list price (as it is for most hardcover books, after 10,000 units are sold), (3) the average marginal cost to manufacture the book and get it to the store is $3, and (4) the return rate is 25% (a handy number — if one of four books produced is returned, then the $3 marginal cost of producing the book is spread over three other books, giving us a return cost of $1 per book). We also rounded up retail list price a few pennies to give us easy figures to work with.
 
“The Help,” by Kathryn Stockett has a hardcover retail list price of $25. The standard royalty (15% of list) would be $3.75. The publisher grosses $12.50 per book at a 50% discount. Subtract from that the author’s royalty ($3.75), cost of production ($3), and cost of returns ($1), and the publisher nets $4.75 on the sale of a hardcover book.
 
“Hell’s Corner” by David Baldacci, has a retail list price is $28. The standard royalty is $4.20; the publisher’s gross is $14. Subtract royalties ($4.20), production and return costs ($4), and the publisher nets $5.80.
 
“Unbroken,” by Laura Hillenbrand has a hardcover list price of $27. Standard royalties are $4.05. The publisher’s gross is $13.50. Subtract royalties of $4.05 and production and return costs of $4, and the publisher nets $5.45.
 
Doing the Numbers: E-Book
 
E-book royalty rates are uniform among the major trade publishers, but pricing and discounting formulas fall into two camps: the reseller model favored by Amazon (Random House is the only large trade publisher using this model) and the agency model introduced by Apple a year ago. (See yesterday’s alert for more information on these models.)
 
Under the reseller model, the online bookseller pays 50% of the retail list price of the book to the publisher and sells the book at whatever price the bookseller chooses (for bestsellers, Amazon typically sells Random House e-books at a significant loss). Random House frequently prices the e-book at the same price as the hardcover until a paperback edition is available.
 
Under the agency model, the online bookseller pays 70% of the retail list price of the e-book to the publisher. The bookseller, acting as the publisher’s agent, sells the e-book at the price established by the publisher, but the publisher is constrained by agreement with Apple and others to set a price significantly below that for the hardcover version.
 
The unit costs to the publisher, under either model, are simply the author’s royalty and the encryption fee, for which we’ll use a generous 50 cents per unit.
 
Here’s the math:
 
“The Help” has an e-book list price of $13 and is sold under the agency model. Publisher grosses 70% of retail price, or $9.10. Author’s royalty is 25% of publisher receipts, or $2.28. Publisher nets $6.32. ($9.10 minus $2.28 royalties and $0.50 encryption fee.)
 
“Hell’s Corner” is also sold under the agency model at a retail list price of $15 list price. Publisher grosses 70% of retail price, $10.50. Author’s royalty is 25% of publisher receipts, or $2.63. Publisher nets $7.37. ($10.50 minus $2.63 royalties and $0.50 encryption fee.) 
 
“Unbroken” is sold by Random House under the reseller model at a retail list price of $27. Publisher grosses $13.50 on the sale. Author’s royalty, at 25%, is $3.38. Random House nets $9.62. ($13.50 minus $3.38 royalties and $0.50 encryption fee.)
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21 Responses to “How E-book Royalties are Cheating Authors”

  1. kikiswan@cox.net Says:

    Question: If I allow XLIBRIS to convert my novel from 2002 into an e-book, and give them distribution rights, how will I receive any royalties?

    This sounds like a bad deal. Thanks for your help! Kiki

  2. andyrossagency Says:

    Kiki, I’m not familiar with the royalty schedule for Xlibris or their rights agreement. If they do not currently hold rights for ebooks under your contract, you are free to publisher your ebook elsewhere. Smashwords.com is frequently recommended, but there are others. Ebook royalties for self-published books are quite generous. frequently 70% of list price. And you can set your own price to what the market will bear.

  3. Do publishers pay a fair royalty rate for eBooks under the agency model? | BookBaby Blog Says:

    [...] Another agent I know agrees and wrote a great blog post about it. [...]

  4. abu bakr ejaz Says:

    Kiki,
    I need some help here! I am about to be published by Macmillan and I wanted to ask its royalty rate on harcover books

  5. andyrossagency Says:

    The typical royalty rate for hardbacks for Macmillan and other companies is 10% of retail price for the first 5000. 12.5% for the next 5000, and 15% thereafter. But beware that most contacts will have a provision to cut that rate in half on sales by the publisher that are made at higher than normal discounts.

  6. Beth Jessup Says:

    Dear Andy

    At present I’m negotiating on an ebook Variation in my contract. I’ve settled for 25% on net, which as you say is standard at this time but I’m also putting in a Sunset Clause to renegotiate upwards on royalties once an industry standard is set. Where I’m also wanting advice is – has a figure on the number of books sold yet been set where royalties will increase e.g. with conventional paperback books 10% of rrp on first $10,000 sold, 12.5% on copies sold after.

    Beth

    • andyrossagency Says:

      Beth. It’s good that you have negotiated the sunset clause for e-book royalties into your contract. Most publishers have been pressured by authors and their agents on this issue and are willing to put language to that effect into their contracts if you request it. Paperback royalties have never been as high as cloth. Tyically a paperback royalty from a large publisher would be a flat 7.5% of retail list price. Some publishers are willing to increase that rate on sales at higher levels. Most publishers are unwilling to give the standard hardback royalty rate (10% on first 5000, 12.5% on next 5000, 15% thereafter) for paperback editions.

  7. Beth Jessup Says:

    Hi again Andy,

    Thanks for your prompt reply. I’m actually Australian and the standard here is 10% on rrp with paperbacks with a rising royalty. though we don’t have your massive audience. I’m actually more interested in the second part of my question on e book royalties i.e. here in Oz the royalty starts at 25% of net, which might be better than our US counterparts but when does the rising royalty come in – on what no of sales and how more is the percentate royalty?

    Many thanks
    Beth

  8. Skipper Hammond Says:

    It’s all confusing for folks who prefer words to numbers, but it seems to add up to: Publish It Yourself.

    • andyrossagency Says:

      Skipper. The choice to self publish or find a commercial publisher is the topic of a very long conversation. It is true that if you self-publish, you get a much bigger slice of the pie. And, of course, you can’t get cheated by the publisher, since it is you. But there are some downsides to self-publishing as well. But that is for another time.

  9. Anonymous Says:

    Don’t publishers realize without authors there will be no books

    • andyrossagency Says:

      I think that publishers are people too. And they are booklovers. And they add value by publishing an author’s book. But they have not yet come up with a formula for e-book royalties that is fair to an author. They make more more on every e-book they sell and the author makes less. Authors and agents believe that this situation won’t last. Competitive forces will force them to offer a fairer deal to authors.

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  15. Perry Says:

    June 22, 2012

    I am in negotiations to sell 2000 books to company X which will use my book as a promotional item. I’d like to write the contract to sell company X the books and have a financial company buy the contract (which has monthly payments coming to me) for a lump sum so I can use the money to print more books.

    I am self publishing via a book printer and getting a decent price on large orders.

    Does this type of financing exist for authors/publishers?

    Thanks, in advance, for your help

    June 22, 2012

  16. andyrossagency Says:

    Perry,

    I’m not a financial analyst so I can’t give you informed advice on that. I’ve heard of companies buying contracts at a discount. But this seems like a pretty small contract. It might be a little tough.

  17. Michael Waggoner Says:

    Could someone please update me (as of 9/8/13) on this issue above of royalty reduction or even no royalty at all due to under reporting etc ? and has anyone found any solution to being at the total mercy of the gorilla in the room that formats, prints, sells, collects payment incl. your royalty) and tells you what you are owed with no verifiable data whatsoever?

  18. andyrossagency Says:

    All book contracts have so-called “deep discounting” provisions. Typically if a publisher sells to a vendor at a high discount, they will reduce royalties to the author. Conceptually it’s understandable. If a publisher sells books at a 70% discount instead of 40%, then the author’s royalty should account for that. The problem is usually a matter of degree. As an agent, I try to minimize the number of sales that fall into this category, either by trying to raise the ceiling for standard discount or reduce the venues where the deep discounting applies. In general you want to try to make sure that no sales in “standard trade channels” (bookstores and book distributors) will be subject to deep discounting. That way it will only apply to places like mass merchants (Target, Costco), gift stores. Things like. Some publishers are pretty fair, and the deep counting is a relatively small part of the sales. Some publishers are horrible. Most publishing contracts allow authors to audit the books to determine if there were mistakes. It’s a big hassle.

    Hope this helps

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