Random House Slashes E-Book Royalties

Here’s some important news on e-book royalties from the Authors Guild…and some essential advice to authors on how to deal with this issue in their book contracts.

* * * * * *

Random House recently advised literary agents that it will reduce the e-book royalties it will pay, starting with contracts signed this month. Since November 2000, Random House had essentially based its royalty rates on the notion — correct, in our view — that selling e-books has financially more in common with the act of licensing than with selling a traditional book. Once an e-book is created, the cost of producing an additional copy is practically nothing, just as a publisher incurs no production costs when it licenses the paperback reprint rights to a book, only the costs of negotiating and administering the license. Until now, Random House has split the net revenue from the sale of e-books with authors 50-50, just as it typically splits reprint-licensing revenues with authors. Random House’s e-book royalty rate had been the best among major trade publishers.

Unfortunately, Random House is abandoning this sensible approach. Random says it will honor its promise to pay 50 percent of net receipts on e-book sales for works under contract by May 31. For contracts signed on or after June 1, the publisher intends to pay 25 percent of list price until the author’s advance has earned out. (In its letter to agents, Random says that 25 percent of list is equivalent to 50 percent of net receipts, implying that its standard e-book discount is 50 percent.) Once the advance on a work is earned, royalties are sharply cut, to 15 percent of list price. For high-discount sales — those sold at discounts of 65 percent or greater — Random intends to cut its royalty rate further by applying its new royalty rates to net receipts rather than list price. That is, for high-discount sales, it will pay 25 percent of net receipts on titles with an unearned advance and 15 percent of net on titles with an earned advance.

What it means:

E-books aren’t dead; these royalty rates will matter. Random House clearly anticipates that e-books will be an important source of income and has decided that the author-relations value of its e-book royalty rates declared in 2000 is outweighed by the costs it now anticipates those royalty rates would incur. (Recent figures confirm that e-book sales are growing rapidly, though from a quite small base.) Those with negotiating clout should do what they can to secure more favorable terms, whether they are negotiating with Random House or any other publisher.

Negotiate the premium or high-discount sales clause carefully. When a sale falls into a contractually defined high-discount category, the result is always a drastically reduced royalty (in the case of Random House, this lops 65 to 70 percent off of royalty earnings). Protect yourself by inserting language specifying that sales will be deemed to be high discount only if they are made outside of normal trade channels. Since most e-book sales are made online, where Amazon.com dominates, it’s conceivable that Amazon may successfully demand high discounts as the cost of reaching its customers. If these sales are deemed “high discount,” then the author would shoulder nearly all of the burden of the reduced revenues to the publisher.

Random House has confirmed to us that they will make this change — specifying that only sales outside of normal trade channels may be deemed special sales — to their contract, but you have to ask for it.

Negotiate a higher royalty rate for direct sales by the publisher. Random House may be anticipating that its own e-bookstores will generate significant revenue. It’s certainly possible. By giving the e-book buyer an incentive to register with Random House (“Any e-book we sell for $1!”), Random could capture the e-mail addresses and other information it needs to market specific e-books directly to those who are likely to buy them. Under the old royalty scheme, Random would have to pay royalties of 50 percent of net receipts for these sales, which might be made at very low discounts. If Random sold the e-book directly at a 20 percent discount, for example, the author would earn 40 percent of list price. (This is fair, since Random would also be doing quite well by the sale.) Under the new scheme, Random would pay the author as little as 15 percent of the list price.

Authors with negotiating leverage should consider seeking a net-revenue based royalty for any direct e-book sales by a publisher or any of its affiliates, including its book clubs.

Important: While this advisory addresses the Random House e-book royalty situation specifically, we think the lessons apply to e-books generally. Authors should be paying close attention to e-book royalty rates when negotiating contracts.

Leave a Comment