Posts Tagged ‘royalties’

The Book Deal: Royalties

November 2, 2009

.Almost all publisher contracts pay authors through a system of royalties, a certain defined percentage of revenue based upon sales of the contracted book. The concept is simple, but it can get quite complicated in practice. Let’s talk about the different formulas that publishers use in calculating royalties and how these translate in income for the author.

At the outset, it is worth noting that for the majority of authors who get published by trade publishers, royalties don’t really matter. Most books never earn out their advance, and authors never receive a royalty check.  Big time celebrity agents often like to brag that if a book “earns out” the advance, they haven’t been doing their job. And there is certainly something to be said for this argument. It means that the agent negotiated a sweet deal, and the author ended up with more money than she would have otherwise earned.

We discussed advances last week. We mentioned that advances are just that: advances against royalties. An author will never see a royalty check until the net earnings from royalties exceeds the advances paid. We also had a little fun trying to estimate he total advance on Sarah Palin’s book some hypothetical assumptions.

The royalty rate is negotiated in the “deal points” phase of contract negotiations, before the contract language is worked out.  A typical royalty arrangement for cloth bound books from a major publisher is: 10% (of retail price) on the first 5,000 sold; 12.5% on the next 5000; 15% thereafter. More important authors might be able to sweeten this deal some. But it is unusual. Royalties on trade paperbacks are less and usually start at around 7.5%. They can increase on volume sales.  Remember that these percentages are based on “list price” or “retail price” or “cover price”. All of these terms refer to the price marked on the cover of the book. Thus, if  retailers discount the price of the book to the consumer (as they frequently do), it has no impact on the author’s earned royalty. The recent price wars amongst Amazon, Walmart and Target, in which books are being sold far below their cost as loss leaders, have no impact on the royalties being paid to the authors. 

Some publishers, mostly smaller publishers,  calculate the royalty as a percentage of  the publisher’s net revenue. This is quite a different accounting method than one based on  the retail price. Net revenue will vary from publisher to publisher. But in general, publishers sell books to vendors for 50% less than retail. If your contract calls for royalties based on “net”, then you should be seeing royalty percentages that are double those of those based on retail price.” If you aren’t seeing that, than it is not a very good book deal.

The calculations can get murkier when you consider that almost all publishers have provisions in the contract to reduce author royalties on sales where the publisher has offered unusually large discounts to the retailer. Typical deep discounting language in a contract might be the following:  “When the publisher grants discounts in excess of 50%, author’s royalties shall be half of the royalties otherwise due.”

Hmm. Interesting. So this means that if a publisher sells a book for 51% discount, and receives 1% less than otherwise, the author will have his royalty reduced by 5%. This  doesn’t seem fair—at least, not fair to authors.

A lot of these deep discount deals are for bulk sales to big box stores or special sales to corporations and institutions. The discounts can be as high as 55-60%. So it is probably fair that the author should make some kind of sacrifice.  But wait!  Maybe not. Consider that these high volume sales are shipped to a single location,  packed on skids,  a single invoice to account for, no returns permitted. The publisher is making considerable profit on these bulk sales.

In my humble opinion, these deep discount provisions are entirely one-sided and have the effect of reducing author royalties on transactions that are actually more profitable to publishers. Unfortunately, these provisions are frequently difficult to change in negotiation. I try to define exactly what classes of vendors they apply to and put into the contract that the provision will only apply to sales outside of normal book trade distribution channels. Otherwise, one could find that most of one’s royalties are going to be based on rates offered in the deep discount provisions, not on the negotiated standard royalty rates.

If you ask anyone in publishing, they will tell you that all thought about the future is centered around the role of e-books. The royalty on e-books has moved to the fore and is now an element of the deal point negotiation. As of now, there is not a firm rule of thumb for e-book royalties. I have seen royalties offered anywhere between 15% – 50% of publisher revenue. Random House, the largest trade publisher, has been offering 25%. I suppose that is as good an indicator as anything else of a prevailing practice.

At the moment, e-books account for less than 2% of book sales. But this could change dramatically and quickly in the coming years. Thus a bad royalty on e-books might not mean much money now. But could be substantial as the e-book takes hold of the marketplace.

It seems to me that an author should be entitled to a much larger portion of an e-book sale than of a physical book. After all, publishers have considerably lower costs in manufacturing, distribution, and returns. But the royalties   being offered to authors on e-book sales don’t seem to account for these savings by the publisher.


What Was Sarah Palin’s Advance?

October 28, 2009

palinEveryone in America is asking today what was Sarah Palin’s advance for her book, Going Rogue. We can’t say for sure, but we can calculate a range by applying some reasonable assumptions. Alaska reported that during the final six months of Palin’s governorship she received a “retainer” of $1,250,000 for her book from Harper Collins, her publisher. Let us assume that this was simply the first payment of an advance to be paid in several parts. Typically an advance is determined by the projected royalties on the first printing of a book. In the case of Palin’s, the print run was 1,500,000. Royalties on hardback books vary from 10-15% of list price. They can be even higher for some blockbusters. Let’s assume that her per book royalty is 15% or $4.35 per book. This would give us an expected advance of $6,525,000.

Another metric that we could use is the estimated number of equal payments that are made for any advance. Typically an advance is divided into a number of equal payments which are made at certain benchmark times. Smaller advances are usually in two parts. Larger ones can be in three. Very large advances can  be made in four parts. Since Palin’s advance is clearly very large, we assume that the reported advance was the first of four payments. This would give us an estimated advance of $5,000,000, similar to the previous estimate.

Of course, the normal economics of publishing don’t really apply to deals of this size. So my calculations would have considerable uncertainty.  The rumored amount on the street when the deal came down was $7,000,000.

Publisher Advances

October 26, 2009

I’ve been speaking to a lot of authors lately, successful ones who make their living writing. Some of them make a pretty good living. I’m finding that a lot of them don’t really understand the economic fundamentals of publishing. They don’t even understand the meaning of “the book deal” a subject that authors  talk about a lot and even obsess about. Most writers  define a good book deal as a good advance. I’m going to talk about the typical elements in a book deal and try to explain them a little bit to writers.

It is important to understand that any book deal has two sets of negotiations. The first is for “deal points”. This involves issues associated with money and is usually the primary concern of authors (and everybody else involved). After these points are decided, we move on to negotiating the remaining terms of the contract. This is often referred to dismissively  as “boiler plate”. It is really a lot more critical than that  and the interests of the author need to be well represented in this phase as well.

Today I want to talk about the first element in the deal points, the advance. We will try to cover some of the other deal points next week.

A lot of authors expect that an agent has at her disposal certain alchemical powers to get windfall advances from publishers for any project. I wish this were true. I won’t make estimates of how large an advance is likely to be offered on a project. Most of the agents I respect  will be pretty circumspect about that as well. But what can be said is that the bargaining power of the author is really dependent on how many suitors are interested in the project. Having three or four interested publishers creates a seller’s market for the book.  Similarly, if after trying for some months to sell a project, one has a single offer from a smallish publisher, there are only limited opportunities to improve this  through bargaining.

The advance  is always the big enchilada for authors and for agents. It is a convenient shorthand for how big a deal is. As in: “This was a very significant deal. High six figures.” It is certainly a good thing to get money sooner rather than later. And authors who are making a living writing books need money in advance to let them live while the book is being written.

Publishers go to some length in contract negotiations to spread out payments of advances as much as possible. If getting money sooner rather than later is good for authors, dragging out advance payments as long as possible serves the interests of  publishers.  Publishers usually will be quite insistent that advances be paid in 2, 3 or even 4 parts. Smaller advances are usually divided into two equal parts. The first paid on signing; The second on delivery and acceptance of the manuscript. Larger advances may have a third payment upon publication. Recently some publishers have added a fourth payment upon publication of the paperback edition. Calling this an advance is doublespeak. The fourth payment could easily be made 3 years after the contract has been signed.

Publishers and publishing gurus will be quick to tell you that advances are “out of control” or indicative of a “flawed business model” and that 75% of all advances never “earn out”. (More on earning out later). As you might expect, authors and agents see things quite differently. There is a story going around that one big-time agent always says “if an advance ever earns out, I haven’t been doing my job”. I prefer to tell my clients that money is money. Although a big advance is nice, there is also money after advances in the form of royalties. But those royalty checks are going to start rolling in, if at all, down the road a spell.

Sometimes, when an author has a lot of publishing suitors for a particular book, the agent conducts an auction. After a few rounds of bidding, the result may be that the offer of the largest advance gets the book. This might not be so advantageous to the writer. It may very well be that  the best home for the book is a publisher who has offered a smaller advance. Most agents understand this and try to structure an auction in such a way that the advance is not the only determinant  of the best offer.

One often hears stories by authors who believe, probably correctly, that they got an advance that was so disproportionate to the sale of their book, that it has jeopardized their ability to get contracts for future works.

A lot of authors don’t understand that the word “advance” means advance against royalties. What this means is that royalties for actual sale of books will offset the advance. No royalty checks will be paid out to the author  until the total amount of royalties and other income generated from sales exceeds the amount of the advance. This is called earning out. In other words, if you have a $10,000 advance, and your royalty statement shows that you have sold enough books to create royalties of $8500, then you won’t get any royalty payments until you have earned an additional $1500 to offset the advance.

Some publishers are now not giving an advance. Frequently they say that this is a new “business model”, or that they are “sharing the risk with the writer.” I suppose this is a little like calling a used car a “pre-owned car.”  The idea is that writers will agree not to take an advance in exchange for a higher royalty rate, with the hope of getting better revenue down the road if the book is successful. Authors beware to make sure that in this arrangement there really is a significantly better royalty rate that accounts for your own sacrifices and risks  in agreeing to forswear  the advance.

It is conventional wisdom that big advances are desirable for another reason as well. A big investment by a publisher in an advance will insure a big commitment  in marketing and promotion to protect their investment. There is probably truth in this. Although there are many stories of the folly of publishers for paying exorbitant advances and then not following up with commensurate efforts at selling the book.

Next week we are going to talk about some of the other elements of the book deal including: royalties, territorial rights, e-books, and other subsidiary rights.