How the Computer Came to Cody’s

 All bookstores need inventory control.  Inventory control is how you manage your stock. We need to know which books are selling and how fast, which books we have run out of, which books need to get reordered and in what quantity,  which have stopped selling and need to be returned, which categories are hot and which ones are not, how many copies of each book we have on hand, how many on order, when that order will arrive, and where is it shelved. Before the computer, we were not really able to get that information very easily.  

 In 1977,  the way most bookstores managed their inventory was by  a  periodic physical book count done by publishers’ sales representatives. A sales rep would make an appointment 3 or 4 times a year to come in, crawl around the floor for a couple of days counting all of the books from his  own  company, and give us a huge list of his titles with the quantities that he counted  and  recommendations for reorders. He’d  also pull from the shelves  a few books that had stopped selling and tell us we could return them.  As you can imagine, this wasn’t very efficient. A lot of bookstores raised this system to an apotheosis by organizing their stores by publisher rather than by subject. It was certainly a convenience for the sales reps, but it didn’t make much sense for the customers. Most of them didn’t come up to the information desk and ask if a bookstore had any nice Random House books they could browse. The system had the effect of insuring that orders were placed as infrequently as possible, sometimes only every 3 or 4 months. The publishers reinforced this system  by giving very generous special deals seasonally to coincide with these big stock orders. Sometimes they even offered delayed billing so that we didn’t have to pay for months.   It was an additional incentive for the bookseller to wait even longer before making reorders of hot selling titles.  All of this tended to insure that we had vast amounts of overstock in the backroom that wasn’t selling and that we were  frequently out of stock on the books that were selling. 

 In the 60s, Cody’s developed what was then a rather sophisticated alternative to this – for its time, at least. We stuffed  2″ x 3″ cardboard inventory cards in every book with the name of the book and the publisher  on the card. We could also stamp the date that we received it to determine what had been on the shelf for too long.  When the book was sold, we pulled out the card  at the register and put it in a box. Periodically we sorted the cards  by publisher in order to determine reorders based on past sales. Each card represented a sale for a particular book. We would  shuffle through them and replace stock by ordering one copy for every card. For a clunky low-tech system, it worked pretty  well and was definitely more efficient than  waiting for the sales reps to crawl around on the floor.

When I bought the store in 1977,  one of the more memorable Cody’s employees was a young graduate student in Computer Science at Cal named John Gage. He was brilliant, articulate, and had a passion for technology, but also a passion for books. Computers were not the all-consuming artifact of   the culture as they are today. For starters, there were no personal computers. Most computers were still big banks of machinery in air conditioned rooms. Obviously  there was no World Wide Web, not even in the exuberant dreams of the futurists of the time. The previous year John convinced Pat and Fred Cody that they should allow him to create a computer section for the store; also a graduate level mathematics section and a collection of similarly high level titles in physics and quantitative economics. As a result, during the 70s and 80s, Cody’s was the preeminent store in the country in these areas. Probably the bestselling book in the entire store for, hmmm, maybe ten years was The C Programming Language by John Kernighan. We must have sold 5000 copies of that book . Most of the computer books were  written for a high level technical audience. The personal computer was barely on anyone’s radar. The Apple 2, which was the real beginning of the personal computer revolution, was introduced in 1977, the same year that I took over the store. The graduate students hovering around the computer section condescendingly referred to the people with Apple 2s as “hobbyists”.

John had a novel idea for the store  that he thought was pretty nifty. —   He liked to use the word, “nifty”.  He figured out a way to control inventory and place orders using a   computer. It was an improvisation, not very sophisticated. But almost all computerized inventory systems today  are highly embellished variations of John’s concept.

John realized that  our clunky card-in-the-book inventory system was easily adoptable to  the  rather primitive (and expensive) computer technology of the time. He developed a scheme  to replace the inventory cards with IBM punch cards. Remember those?  He would collect them every week and take them to the computer center at UC. There, late at night when no one was around to stop him, he would run the punch cards through the giant card sorters and punchers and would generate orders to be printed and new cards corresponding to those orders that would be stuffed in the books when they were received..  We were one of the first bookstores, if not the first, with a computerized inventory control system, thanks to John.  All of a sudden we were able to place orders every week instead of every 3 months. And we had alphabetical lists of every book in the store and in what section they were shelved.  The computer revolution had begun!

What happened to John Gage? One day he was standing in the mathematics section of the store, no doubt browsing an advanced Springer-Verlag book with a yellow cover on a subject like  stochastic processes or applied regression analysis. He got into a conversation with a Computer Science professor from UC, Bill Joy. They went across the street to Café Med and started making drawings on napkins. Ultimately this led to an idea, which developed into a concept, that emerged into a design,  that became a plan for a new type of computer and a company to manufacture and market it.  John and five other people took this plan and went off to Silicon Valley to create a modest sized technology startup called Sun Microsystems. Ultimately John became the head of science at Sun and a major figure in the history of Silicon Valley.  It all began at Cody’s.

The Borders Collapse: What Does It Mean?

 

There is a lot of new information about the Borders bankruptcy. Check out this story in Publishers Lunch. Here are some highlights:

• Borders CFO Scott Henry reiterated that ” Borders aims to stay viable by enhancing its customer rewards program, strengthening its e-book business and expanding more into non-book products.” (Borders has been intoning this for several years in order to explain their strategy for a turn-around. At this point, no one in the industry is buying it. It was a failed strategy before and is no more likely to succeed today.)

 

• Most publishers aren’t talking, but rumor is that most of the majors won’t be shipping books  to Borders even on a cash with order basis. Borders has been buying books from the distributor, Ingram Book Company, but one can only guess at the stringent credit requirements that Ingram is imposing.

 

• In their filings, Borders has claimed an option to close an additional 76 – 136 stores on top of the 200 that were announced (and posted on Scribd) this morning.

 

There are still a lot of questions worth considering as Borders’ bankruptcy progresses. To what extent will Borders’ sales migrate to online booksellers, to Barnes and Noble, to big box merchants,  and to independent stores. I have spoken to several independent booksellers  located near Borders. They seem to think that this will give them a new lease on life.

Probably the more important question is whether Borders’ Chapter 11 filing for reorganization will fail  and cause the company to file a Chapter 7 bankruptcy that will govern the liquidation of the remainder of the company.  Bankruptcy lawyers will tell you that many  of these efforts to reorganize fail, because suppliers are unwilling to risk working with the reorganized company. This certainly seems to be the case with book publishers at this time.

And finally one must ask how many book sales lost by Borders will simply disappear? As the Publishers Lunch article says, conventional wisdom is that 50% of sales will migrate to other venues, while 50% will be lost. However a back-of–the-envelope analysis of book sales since the beginning of the year would indicate that the impact of Borders’ closings will be less dramatic.

There already is a lot of Monday morning quarterbacking trying to explain the Borders collapse. In my opinion, the answer is pretty simple. Borders was the victim of changing buying habits by book customers. The growth of online bookselling has been hurting brick and mortar store sales for years now. E-book sales  have increased exponentially this year to the point where they constitute about 10% of trade book sales. Borders has failed to adopt to this new environment and was not in a position to exploit the e-book phenomenon. Their web presence is weak. For some time, they had even allowed Amazon.com to manage their website! Finally the economy has hit all retailers including booksellers very hard. Borders was already in a weak position going into the Great Recession. And the downturn for them has been devastating.

All of this added to a long list  of foolish management decisions over the years  has made Borders the sick man of the book business.  It is too bad. When Borders first began expanding 20 years ago, they were considered a class act, a company much more attuned to the culture of books than Barnes and Noble.  Ultimately this changed, and has not been the case for a long time.

To be sure,  Barnes and Noble is struggling with many of the same stresses as Borders, but they seem to be more successful at adopting to the changes going on in the book business. At least for now. Borders had a reputation of overpaying for leases. (When I was planning my bookstore in the Union Square district, my real estate agent told me that the nearby Borders on Post Street was paying rent in excess of $1,500,000 per year.  That store is scheduled to close). Barnes and Noble has announced that they are going to be reducing the square footage  devoted to books in their stores and selling more sideline items. But they, too, have been closing underperforming stores. B&N early on has focused much more on Internet sales, believing that this was the future of bookselling. Barnesandnoble.com is second to Amazon in online book sales, but it is a distant second. Unlike Borders, Barnes and Noble has embraced e-books. Their e-book reader, The Nook, has gotten excellent reviews and accounted for the fact that this December Barnes and Noble had its best sales ever. However if you discount the sales of the Nook, the picture is not so rosy.

Ultimately the fall of Borders is linked to the seismic changes that are going on in book publishing now. How this will sort itself out in the future is unclear. But one thing that seems certain is that people are continuing to read books even if they exist in new formats and new packages. I guess this is the good news.

More News on Borders

More news on Borders bankruptcy is dribbling out. There is an article on Publishers Marketplace that has new information. Here are some highlights:

• Borders sales for the year 2010 were down 14$
• Sales for the 4th quarter which includes the all-important holiday season were down 19%, a sign that Borders condition was deteriorating.
• Borders is seeking to negotiated credit terms with major publishers to resume ordering inventory. However some publishers have stated that they will only sell on a cash basis
• It is estimated that book publishers may only recover 20 cents on the dollar
• The list of 200 stores scheduled to be closed has not been officially released but was leaked on Scribd.

I’ll try to do some more post as information is released.

Flash: Borders Files For Bankruptcy

Borders filed for Chapter 11 bankruptcy today in New York.  The company announced that it would close 30% of its “underperforming” stores. Papers also indicated that the company had liabilities of $1.29 billion and assets of $1.28 billion.  The largest publisher creditors were: Penguin Books with $41,000,000 owed, Hachette Book Group with $36,000,000, Simon and Schuster with $33,000,000 and Random House also with $33,000,000.

For months now most people in book publishing have been expecting this to happen. At the end of December Borders announced that they would not be paying any of their suppliers for the month and again failed to pay at the end of January.

Filing for Chapter 11 bankruptcy does not mean the end of Borders. It allows for a structured reorganization of the company that will seek to allow them to shed expenses, such as unprofitable stores, and protects them from creditors until they can get on their feet again. Often businesses that go into Chapter 11 bankruptcy later file for liquidation.

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Blogging tips for writers. Check it out.

Cody’s As it Was in 1977

When I became the owner of Cody’s in 1977, it was primarily stocked paperbacks. Although the idea of a paperback bookstore was novel, paperbacks had been around for a long time, at least since the mid 19^th century. The first strictly paperback  publisher was Pocket Books, founded in 1939. Its famous logo of  Gertrude the kangaroo is still on the spines of Pocket Book titles.  The company is now an imprint of Simon and Schuster.  The first title they published was Lost Horizons by James Hilton.

New paperback publishers started popping up in the 1940’s. Penguin Books, Bantam, New American Library,   and  Ballantine Books still live on today as imprints of larger houses. The  books they published were called “mass market” paperbacks. They were and continue to be rack sized books and were primarily sold outside of the traditional book channels. Mostly you found them in magazine outlets and drug stores. In the 1950s publishers started producing “trade paperback” books. These were of a larger format and were usually sold in the new paperback oriented bookstores like Cody’s and Keplers.

Before the mid-1970’s, booksellers couldn’t buy mass market books direct. They were forced to buy them from local magazine distributors with unfavorable trade terms and limited selection. A lot of these distributors were run by the mob, who kept both the bookseller and the publisher in a state of terror. Gradually publishers started showing some uncharacteristic backbone and began selling direct to booksellers. There were a number of reports of “representatives” from the magazine distributors, goons really, making personal visits to booksellers in order to discourage them from dealing directly with the publishers. But the booksellers (who were mostly small shopkeepers back then) showed their  characteristic courage and independence that continues to be their hallmark to this day. Fred Cody told the story of a visit from one of these representatives who threatened to break his knees.

Although the mass market publishers sold reprints of hardback bestsellers, they really excelled at genre fiction. That still is their long  suit today. Genre fiction is a publishing term of art for mysteries, science fiction, fantasy, westerns, thrillers and romance. A lot of the stuff was pretty cheesy. The covers in those days were wonderful —  full of babes in suggestive poses, their bodacious bodies pouring out of their skimpy clothes. Titles like Flesh Pots of Malibu. Some nice lesbian action too, mostly taking place in ladies’  prison blocks.

My favorite genre back in the 70s were the romances which we called “bodice rippers” referring to the formulaic schlock-o covers  of shirtless muscle men and swashbucklers ripping the bodices off  the swooning, usually excessively endowed, heroine. I remember every year at the booksellers convention, the romance publishers would hire big hunks, usually dressed up as pirates to promote the titles. There were also women at the booths who all looked like a cross between Scarlett O’Hara and Daisy Mae Yokum. The most popular and probably the most tasteless title in this genre was one called: Mandingo. It had a a larger than life slave with bulging muscles popping out of his tattered clothes along with the daughter of the slave master, ripped bodice and all, swooning at his feet. 

 In 1977 Cody’s was a large store for its time. It was about 8900 square feet. That’s not impressive compared to the giant superstores around the country now that are sometimes as large as 60,000 square feet. It always seemed a lot larger though. The Codys had built this structure themselves in 1963. The main room was 35 feet high with floor to ceiling windows giving it a cathedral-like feeling of space. It was filled up with funky homemade pine bookshelves sagging with spine out paperbacks. It was pretty impressive when you walked into the store. It looked like it had every book ever published.

  When I bought the store, there were only 17 employees. But that was an enormous change for me. I had previously only managed one or two people at any given time. The staff were paid $3.25 per hour. Pat Cody always said that the employees  had to settle for the psychic compensation of being surrounded by books. It was true that most of the employees were hired because they, too, had a passion for books. I was fortunate to have two managers who were experienced, competent and gifted booksellers. The general manager was Nick Setka. He was 27 years old then and did most of the buying for the store, which was perfect for his wonderful, intuitive understanding of books. Ed Manegold, then in his early 30’s, was the assistant manager. He was smart, committed,  and much more tough minded than either Nick or me.   Outside of finding the right book for a customer, buying was the only fun job in bookselling. So I tried to join in on that. Usually Nick and I would sit down together with the salesmen. Back then the sales reps were known with the rather quaint name of: “travelers.”  Nick is still in the book business. He is a manager at Book Passage in Marin County and works there with my wife, Leslie Berkler.

In 1977,  the store was organized and stocked in a way that reflected the passions of the owners, Pat and Fred.  The front table, the most prominent real estate in the store, was filled with self-published and small press  books. Fred believed in small presses with a passion. It was a kind of political position. He once made a public statement that he would stock one copy of any small press book that was offered to him.  That statement came back to haunt him, but it tells a lot about Fred’s passion as a bookseller.  I was less thrilled with the small presses. A lot of  those books seemed to be  solipsistic exercises. But still  times were different then and there really were some phenomenal small presses, many of which were located in the Bay  Area. Some of them still exist today. City Lights Books in San Francisco started its publishing arm in 1955. It most famously published Allen Ginsberg’s Howl  the following year. Over in Berkeley Phil Wood gave up his sales rep job at Penguin and decided to start publishing. His first book, Anybody’s Bike Book, inspired the name for his new publishing company, Ten Speed Press. The book went on to sell a million copies, and Ten Speed Press still exists today. In 2009  it was bought by Random House and continues to be an imprint there. Phil died in 2010 after a long bout with cancer. He was a legend and a reminder of a time when publishing was  a more personal endeavor  driven by people with a passion for books.  I admired Phil tremendously throughout his career and will miss him. I miss him a lot.

Here is a list of the bestselling titles of 1977, the year I bought Cody’s.

Fiction

1. The Silmarillion, J.R.R. Tolkien; Christopher Tolkien

2. The Thorn Birds, Colleen McCullough

3. Illusions: The Adventures of a Reluctant Messiah, Richard Bach

4. The Honourable Schoolboy, John Le Carré

5. Oliver’s Story, Erich Segal

6. Dreams Die First, Harold Robbins

7. Beggarman, Thief, Irwin Shaw

8. How To Save Your Own Life, Erica Jong

9. Delta of Venus: Erotica, Anaïs Nin

10. Daniel Martin, John Fowles

Non-fiction 

1. Roots, Alex Haley

2. Looking Out for #1, Robert Ringer

3. All Things Wise and Wonderful, James Herriot

4. Your Erroneous Zones, Dr. Wayne W. Dyer

5. The Book of Lists, David Wallechinsky, Irving Wallace, and Amy Wallace

6. The Possible Dream: A Candid Look at Amway, Charles Paul Conn

7. The Dragons of Eden: Speculations on the Evolution of Human Intelligence, Carl Sagan

8. The Second Ring of Power, Carlos Castaneda

9. The Grass ls Always Greener over the Septic Tank, Erma Bombeck

10. The Amityville Horror, Jay Anson

Not such a bad list of titles, all things considered. The really hot books at Cody’s were quite a bit different though. Yes, we sold bunches of Carlos Castaneda, Tolkien, and Alex Haley’s Roots. And even a few of the less memorable titles on the list like James Herriot, Erma Bombeck and The Thorn Birds. 

But Cody’s was really marching to the beat of a different drummer. We would sell hundreds, even thousands, of books like Of Grammatology by Jacques Derrida, The History of Sexuality by Michel Foucault,  Anti-Oedipus by Gilles Deleuze and Ecrits by Jacques Lacan.  (And almost anything else by French philosophers and considered “post modern”). These books were all written with such opaque jargon that they could only be understood, if at all, by those initiated into mysteries of the cult of deconstruction.   To the cognoscenti, these books were nothing less than a redefinition of philosophy and literary theory. For the rest of us, it seemed like fashionable nonsense.

 Radical politics was still a passion in those days and  was reflected in the books available in the store. Herbert Marcuse’s One Dimensional Man had inspired a generation of radical students since its publication   in 1964. Cody’s had two cases of books on “Marxism”. Aside from the collected works of the master and his major disciples, Lenin, Mao,  and Gramschi, we sold a lot of the contemporary Marxist thinkers. Perhaps the most popular of the new Marxists was Louis Althusser, another French scholar. He was considered a “structuralist” which I guess gave him a license to write the obligatory impenetrable prose. In 1980 he strangled his wife to death. But  this did not seem to have harmed his reputation as a brilliant intellectual.  His fans spent a lot of time spinning out strained arguments about why we should distinguish between the profundity of his ideas and the fact that in life he was a homicidal psychopath.  They should have just accepted it as an embarrassment and left it at that.

 Scholars and philosophers  like Jürgen Habermas, Hannah Arendt, Fernand Braudel, Claude Levi-Strauss, Jean Piaget, and Walter Benjamin sold well at Cody’s over the years. At one point, Cody’s was selling 10% of the national sales of Walter Benjamin’s classic work of literary criticism, Illuminations.

In contrast to the two cases of books on Marxism, the six cases on philosophy and the ten cases on criticism and literary theory, we only had one shelf of books on business, half of which was taken up by a single title, What Color is your Parachute?

The world changes and bookstores reflect those changes. As we moved into the 21^st century, the business section had increased to about 20 cases including subsections on management, sales, real estate, and investing. Marxism became a kind of an intellectual footnote, of importance only to the history of ideas. Most of the titles in the Marxism section quietly went out of print or stopped selling. And we folded up the section and incorporated the few remaining titles into politics, history, and philosophy.

Cody’s maintained its reputation as a great venue for scholarly titles until the very end. One of the saddest moments in my career was in early 2006. Unlike most retailers who put excess inventory on sale, bookstores can return books that are no longer selling to publishers. We did this almost daily based on lists that were kicked out by the computer of titles with no sales for the previous nine months. I was pulling returns that day and noticed that on the returns  list was our last copy of Kant’s Critique of Pure Reason. I was stunned to think that I was taking the most important work of modern philosophy out of the store, but it hadn’t sold in over a year. I left it on the shelf anyway. But that was when  I realized that our time was up. Six months later we closed the Telegraph Avenue store.

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.)

Authors Guild Analysis of Amazon’s Failed Attempt to Control the E-book Market

There is a great statement from the Authors Guild that analyzes the failed efforts by Amazon.com to create a monopoly on the sale of e-books. Last year, when Amazon had about 90% of the market share of e-books, they were routinely selling them below cost for $9.99. Five of the six largest publishers (Random House is still holding out) made deals with Apple to adopt a new “agency” model whereby the publisher would set the price on the e-book and offer each retailer a 30% commission on sales.  This restricted Amazon from engaging in ruinous price competition in order to drive competition out of the e-book business. Today Barnes and Noble, Google, Apple, and independent stores are gaining market share. The strangle hold of Amazon is being attenuated.  Check out this analysis by the Authors Guild. It is the best statement I have seen explaining the history and the impact of these important developments.