Here's an Authors Guild report regarding how publishers are ripping off writers on ebook royalties…

**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.

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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

Are they for real with that letter? O_o

Publishers playing bait and switch with cash flow? Color me astonished. :/

It should read something like:

“Hey, so we just got some stuff going that possibly violates antitrust laws, but makes us WAY more money, so we’re gonna throw a few pennies your way and make it look like you’re going to get more money long-term. But you won’t. We will. Muahahaha. Haha.”

“But do know that we are in this together and that our interests are aligned.”Aligned in the sense that both parties are facing the same direction…

Lee thanks for sharing these excellent examples of unfair ebook royalties. Tom Chandler (TCWriter, see above comment) left a comment on a post I just wrote on the same subject directing us here.

Just put your blog in my feed reader.

Lee, I appreciate all the light you shed on these topics. I received the letter from Macmillan pasted above. Even though 25% of net sucks, isn’t it still better than 10% of list price, generally speaking? I’m trying to decide if I should sign the amendment or not, and it seems like 25% of net would be the lesser of two crummy options. Any thoughts?

I’ve run into publishers doing eBook editions only and saying they don’t pay an advance on eBooks, only print. Somehow, them saving by not having to front the costs for a print run translates into ‘so we won’t pay advances, either’. I just plain don’t understand it.

Lee, I know that you wrote this several months ago but I didn’t see it until today when my dad posted a link to it on FB.

Firstly, I am glad that you wrote about this real problem facing Authors and Publishers. I am also impressed that the Authors Guild took the time to communicate with members about the issues at hand.

That said, fixing this sort of problem – one that has roots in both Change and Relationship Management as well as serious gaps in the standard processes for accountability, equity and transparency – is what I do for a living.

Just like you write books, I determine root causes, identify core issues for both sides and do my best to propose multiple paths to resolution on problems like these. As nobody has hired me to do an analysis on this I obviously can’t go set up meetings with representatives of the publishing houses and Authors Guild to validate my understanding of core issues but I can work with standard assumptions and the information found in the letter you quoted from on rates etc to establish a baseline to work from. And because I am a big geek who likes this sort of thing, I am going to do just that.

I am embarrassed to admit it but I am actively drafting a document about this issue and will post it someplace when I am done – who knows maybe someone from the Guild will see it and retain my consulting services to help solve this problem – because an equitable resolution is not only possible but necessary.

I’m at a loss. What should I ask for, and how long should that be in effect in such a rapidly changing market? This would be my e-book and app royalties on previously-published still very-well-selling books. Any suggestions will be much appreciated as I don’t know where to go for practical help.

After an extensive read of the above I am in shock. I have a title that has sold steadily for 15 years and, although not a bestseller, has been well received and produced an income source. My publisher – Wiley and Sons, are ‘considering coverting to eBook’ and want me to sign a contract for 10% of net receipts for all electronic versions forever. They state they are offering this to all their backlist authors. Are we all being taken for a ride if we do not do the research that is clearly available online?

Gavin,

Yes, you’d have to be clinically insane to take that deal.

Lee

My book MOM SAID KILL from Kensington’s Pinnacle imprint was only available in paperback for a limited time, although consistently available as an e-book. This, of course, makes earning back my advance at the lower dollar amount of e-book royalty a much longer process. Is this on purpose?