The Shatzkin Files


Paying authors more might be the best economics for publishers in the long run


If you imagine the publisher’s business as one that divides most of the consumer’s dollar between two core stakeholders in the supply chain — the retailer and the author — you’d have a pretty accurate picture. The publishers, at least theoretically, decide what the retailer’s “working margin” will be with their discounts and agency agreements. And they decide what the author’s share of the proceeds will be by the advances and royalty rates they offer and agree on through their contracts.

These are the essential, and basically non-substitutable, trading partners for a publisher. They can choose a different printer or publicity firm without changing the character of their business or their economics. But the author relationships are existential and defining and the intermediaries who reach the public and enable the consumer transaction are indispensible.

Plenty has been written, by me and others, about the challenges trade publishers face due to the decline of shelf space for books. But, in some ways, it looks at the moment like those (also including me) who have said that publishers are in big trouble as bookstores decline are mistaken. Sales in stores are declining and sales of print books are declining but total sales, including ebooks, are holding pretty firm and the big publishers are reporting pretty healthy results. So if declining bookstore shelf space, which we have clearly seen over the past few years, doesn’t weaken trade publishers’ commercial performance, what will?

I have written before about asking my friend and sometimes-collaborator Mark Bide a similar question about another segment of publishing. As a John Wiley stockholder, I was worrying 15 years ago about their reliance on journals for their revenues and profits. We thought way back then that journals were likely candidates for disintermediation. After all, the university pays the professor’s salary to write the journal article that the publisher gets for free and then monetizes by charging the same university’s library for a subscription to the journal. Even in the early days of the web, we could see the potential for professors to post their own articles and for peer review to be crowd-sourced, delivering the IP to the academic community faster and saving universities a boatload of dough.

At the time Mark said the thing to watch was whether the publishers stopped getting the submissions. If the professors didn’t need the journals, they’d stop getting the raw material that feeds the whole engine.

So far, it hasn’t happened (and I still own the stock). Despite lots of open source academic publishing, the journals remain important brands in their fields and the professors want the journal publication as a credential. (In books we know that lots of people read the book and have no idea who the publisher was. In journals it is the opposite: more people will know the professor published in the journal than will read the article.) The business has changed and library budgets grow considerably more challenged, but most of the journals, including Wiley’s, remain highly profitable and highly desirable to the authors.

In fact, Mark identifed the point of vulnerability for trade publishers. If the stores and other intermediaries they rely on go away, they have to find other ways to sell their books. That’s a challenge, no doubt.

But if the authors don’t play along, they have nothing to sell. Making deals with authors is the publishers’ price of admission to the game.

As the central player whose contracts and sales terms manage the distribution of revenues throughout the supply chain, how publishers view the commerce of our business is central to how it operates. This has, historically, been challenging. The activity of publishing is complicated and its economics are complicated.

A couple of months ago, Michael Cader pointed out to me that the big publishers were making a serious tactical error in the way they were accounting for sales under the agency arrangement. (Quick reminder: under agency, the publisher is considered the “seller”, not the retailer. The publisher sets the price which the retailer can’t change and pays the retailer, or sales “agent”, a fixed 30% of the set price paid by the consumer.) Publishers simply imitated their convention from the wholesale terms transactions they’d always done before. They book as revenue the 70% they keep of the sale, not the full price the consumer pays (and which, if they did, would make the 30% paid to the retailer a “cost of sale” like printing or shipping is in the physical world or like DRM costs might be in the digital world).

Cader spelled out two important benefits that would flow to publishers if they made a different choice of how to account these sales. (He says, and I trust him, that GAAP rules don’t require them to employ the methodology they do.)

One is that that their “top line”, their “total revenue” line, would be higher. That’s critical to foster a helpful perception in the investment community, which worries when they see declining revenues. And if publishers insist on sticking to booking only the 70% they get on the ebook sales as the total revenue, they’re locked into declining revenue for years to come as competition drives down ebook prices (probably) and as ebook sales continue to replace hardcover print sales (for sure).

The other perception publishers are manipulating against their interests is within their negotiating community. Both agents (on behalf of authors) and the big accounts publishers sell through look at the publishers’ margins as a percentage of sales to decide if there’s more there for them to get. Reporting ebook sales as they do, publishers are achieving about 75% margin on ebook sales (because they give 25% of the take to the author.) If they took the full price as the revenue, they’d be achieving 52.5% margin on those sales (although, of course, nothing really changes.)

There are fewer knock-on problems for the publishers when the big accounts move to convert this (apparently excess) margin into changed business terms than if they allow agents to change the author deal. Changes forced by Amazon or Barnes & Noble could conceivably affect only them, depending on how the change in terms were framed.  But were an agent to succeed in pushing up the contractual ebook royalty, that change could affect a whole host of other contracts because of most favored nation clauses. That could mean royalties are suddenly due on contracts that under the previously-negotiated royalties hadn’t earned out their advances.

So we acknowledge that the price of raising contractual ebook royalties could be high. But it still might be worth it. As we will see later, more margin given to accounts achieves no incremental gain for the publishers; more margin to authors does.

There’s one more very big reason for publishers to change their accounting in the way Cader’s insight suggests. Right now, every big publisher’s life is being disrupted by state, federal, and international investigations into the legality of agency selling, which is characterized by some as “price fixing”. The defense is that the publisher, not the retailer, is the seller and it isn’t illogical for somebody selling something to charge the same price to every customer no matter how they reach them.

If “I’m really the seller” is the defense, it would be much more persuasive if the accounting supported that paradigm. As it stands, the accounting contradicts it.

The total situation not only argues for publishers to change their accounting, it also argues for them to give a bigger percentage to authors and to do it now! Doing so would deliver them two important benefits. It would reduce the apparently excess margin that their retail trading partners are noticing and coveting. But — of much greater importance —  it would also reduce the differential between what Amazon (and who knows, perhaps B&N in the future) offers an author and what the publisher offers, making it more difficult for Amazon to lure their authors away with higher royalty terms.

In fact, they might even get some sympathy from Barnes & Noble about having less excess margin to trade if they can make it clear that giving more to authors is keeping them out of Amazon’s clutches, which B&N and all other retailers absolutely need them to do.

Part of what prevents publishers from seeing merit in paying more to authors is their high cognizance of another accounting element they track: unearned advances. Unfortunately, either publishers aren’t looking at that category of expense in the right way or they’re eliding important distinctions when they discuss those unearned advances with agents.

Because all unearned advances are clearly not created equal. All of the biggest authors pile up unearned advances because they are intended to be unearned. When the agent for a megaselling writer sits down with a publisher to negotiate the advance, they are often negotiating around dividing up what they both see (perhaps without explicitly saying so) as the total revenue pie likely from the book. That leads to agreement on the advance against royalties, which divides the revenues at what is effectively much higher per-copy royalties than standard contracts call for.

But then, for reasons of “not establishing precedent” and, perhaps, not kicking in “most favored nation” clauses that could exist in other contracts (all in the publishers’ interest), the actual contract has conventional royalty splits. The book would have to sell a big increment over expectations to “earn out” on conventional royalties. That’s very unlikely because these are deals done with highly established authors where the track record is a good predictor of future performance.

So some of these “unearned” advances were never intended to be earned; they simply measure how much of a premium the publisher was willing to pay to get certain revenues into the fold.

In other words, publishers aren’t trying to manage all unearned advances down, just some of them. And if they don’t make that distinction (and some further nuance to their measurement) when they analyze this, they’re doing themselves a disservice in a number of ways. Right now, one of those ways is that it is persuading them not to pay higher royalties when doing so could well be in their interest, both because it will keep the author away from Amazon and because it leaves less margin on the table for their trading partners to pursue.

Declared royalty rates that are closer to what Amazon can offer are critical for publishers to turn around a PR war for new authors that they have been losing. The focus of a great deal of the author community buzz is around the ebook royalty differential. Disadvantages of self-publishing — the biggest three being the actual financial cost of necessary editing and core marketing (like a cover); the difference in risk between taking those costs versus taking a revenue guarantee in the form of an advance; and the additional marketing and sales a publisher generates (right now largely through the merchandising and additional revenue from print) — are too easy to ignore or elide. The royalty comparison is straightforward and apparently persuasive when it is as stark as it is now.

A 50% ebook royalty from an agency publisher on revenue after agency commissions would match the 35% royalty that Amazon pays when they pay advances and publish. But publishers don’t actually have to reach that number to be offering  a better deal because they offer sales through other channels Amazon currently either doesn’t reach or actually prohibits employing when they pay an advance to publish. It’s just a tough argument to make when they offer half that number.

One more reflection on unearned advances to bend your mind in the other direction, and then we’ll stop. When the publisher sells a copy of a book that has an unearned advance, the cash flow for this month on the book is better, because no payment to the author is triggered. If publishers paid authors higher royalties on ebook sales, they’d have fewer dollars in unearned advances (because books would earn out faster) very quickly. Of course, that’s not “good” for them because it means they have to pay new royalties on those books as they sell. This is just to say reiterate what I said above: publishing economics are complicated. Anytime you hear them oversimplified, like by somebody lumping together all “unearned advances” into a number or a percentage and wielding it like evidence or analysis, have your grains of salt handy.

I make no secret that my view of the world is publisher-centric. I was brought up that way and I’ve spent 50 years learning about the book business with that point of view. And I also make no secret of my high regard for the current leadership of the biggest publishing houses. With all due respect to the executives of my father’s generation and since, the current crop of leaders is the smartest and most thoughtful and innovative group I’ve ever seen in those slots. But (unless I’m missing something, which is, of course, always a possibility…) they all appear to be making the same mistake at the moment. I would sum up the observations from this post with three suggestions for today’s biggest publishers:

1. Change the way you account for ebook sales in the way Michael Cader suggests: call the consumer payment the top line revenue and the payment to the retailer a cost of sale.

2. Recognize that no excess margin will go unpunished. The forces of big author agents and powerful retail channels will assure that. You know there’s a minimum margin you need to survive; in fact there will also be a maximum margin you’ll have any prayer of holding onto.

3. Pay authors more so you can pay retailers less. There will be a direct connection between the two.

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  • Anthea Lawson

    Kobo recently unveiled their new self-publishing author program. They match (or exceed!) Amazon’s royalty split.

    Kobo is just starting to sell in England, and they have been bought up by Asian media giant Rakuten. 

    Great article, Mike, and I agree that publishers need to step up to the plate with e-book royalties. The competition for authors is only growing…

    • JR Tomlin

      I love good royalties but that doesn’t mean customers will find my novels on Kobo. What is their search engine like? If it sucks like the Apple one does I won’t be in a hurry to list there. Will they mainly cater to the Big 6 as B&N does, or actually give indies some advantages as Amazon does?

      In the past, I have been so under-whelmed by Kobo that I jerked all my novels, and I was a LONG way from the only one. Maybe they’ve fixed their past problems but I have to see that first.

      • /blog Mike Shatzkin

        There simply *are more* customers at Amazon than at Kobo. I agree with you that Amazon’s search engine is superior to the other retailers and I’ve pointed out that their shopping experience is the best. But there are customers elsewhere who, for whatever reasons, prefer a different retailer. In fact, Amazon probably has its biggest market shares in the US and UK. It’s a big world. You can still get most of it through Amazon, but you leave sales on the table if you’re *only* with Amazon.

        Mike

      • Scott Nicholson

        Publishers do have one opportunity–starting their own exclusive digital libraries (similar to the Prime lending model). They have the brand names, they have the content, and they have the advantage of exclusivity. I understand the individual author contracts would be messy and would likely need additional clauses, but it’s the last bullet in the gun. Publishers probably should have done this several years ago, when they saw this coming (although I think it’s safe to say that very few thought it would become a digital tsunami so suddenly).

        I’m neither for nor against big publishing. I’d like people to be able to continue doing the things they love if possible, but I just have no emotional stake in the game. It’s not easy for anyone right now. A good book helps.

      • /blog Mike Shatzkin

        Scott, I’m not sure that works. First of all, *each* Big Six company only has its pie-slice of the bestselling authors. Second, most of them wouldn’t agree to a subscription-based revenue model, even if administered by the publisher.

        If the end-state of a digital publishing world is that Amazon controls much more than half of it, then it is really going to be rough sledding for publishers. Publishers have to count on an ecosystem that is more dispersed than that, which can be the case if agency isn’t struck down somehow. Then their advantage will be what it has always been: reaching the customers through all the possible channels.

        Mike

  • Chris

    Mike, we know that the shift to online sales is impacting every single bricks and mortar business across the world. So you have to transition to being a online retailer to ensure longterm survival.

    We have a billionaire retailer here in Australia screaming about how the $1000 import duty limit is killing the retail environment. And it is. Plus it’s going to get a whole lot worse. The whole retail landscape is the easiest business model to disrupt.

    Last week the billionaire finally caved in and embraced online shopping in a big way.

    Amazon’s in-store app is a fine example too. They’re going to fleece B&M sales right under their noses. 

    There’s two choices here:

    1. Publish books and sell them through Amazon.
    2. Publish books and withhold them from Amazon.

    The first choice gets traffic to your book  and strengthens Amazon’s brand.

    The second lowers your revenue but may build your brand over time.

    In simple terms:

    – Amazon’s doorway is just a domain name.
    – The ebooks are just ones and zeros.

    Publishers, seriously, pay for your goddamn content, grow your communities, build your brands and sell your own books.

    Or sit in silence and count the cash you receive from Amazon’s extremely powerful and state of the art retail point. 

    Maybe everyone in publishing should preface every future decision with this question: “What would Tim O’Reilly do?”

    Or Joe Wikert.

    Or best of all…. Jeff Bezos!

    • JR Tomlin

      Your wrong. Amazon is not just a domain name. Amazon is an extremely powerful search engine which makes finding products you want amazingly easy. It is also a data collector and algorithm producer that then puts products which customers want in front of them.

      I can not tell you how many times Amazon has put a link to a novel in my email inbox before I even had time to go look for it.

      If that is really what you think, you have missed 90% of what has made Amazon successful.

      • Chris

        Of course, that’s true, JR.

        Which is why I said “doorway”. The inference being that their distribution model is entirely digital. Therefore the old school power of multiple Bricks and Mortar outlets doesn’t play online. Publishers don’t have to build 200 Barnes and Noble stores to be a retailer.

        That said, Amazon has formidable digital infrastructure that could almost be seen as a barrier to (successful) entry for others.

    • /blog Mike Shatzkin

      Chris, I missed this because it somehow ended up in my spam filter. Late reply.

      I can’t go with you on this one. First of all, following your own logic, note that Tim O’Reilly is still happily selling his books on Amazon.

      But a legit publisher simply can’t follow the strategy you’re suggesting. They have a responsibility to their authors to sell as many copies as they can. You’d hear the screams of agents from New York to Australia if they stopped selling Amazon as part of some overall strategy.

      Amazon sells a lot of books very effectively. Publishers have to somehow figure out how to sell lots of books in other places too. If they can, they’ve got a business. If they can’t, I’m not sure the authors or readers * care* if they have a business.

      As for the importation law in Australia, I can understand the frustration.
      Mike

      • Chris

        The key point here, Mike, is that Tim has a really strong presence online. His core community buys from him first and foremost.

        I even buy titles from him because of the multi-format offering. At least there is some differentiation there between the two. That alone is a better deal than a purchase from Amazon because you get more for the same price. I simply email the mobi file to my Kindle email and it syncs to my devices.

        I guess what I’m saying here is that O’Reilly gives me a reason to purchase through them. But they can only do this because they have a great online presence and a bonus file.

        O’Reilly distributes to Amazon but I would be surprised if it amounted to the bulk of his sales. Of course, I base this on my usual data… ie none at all…!!

  • Chris

    You can add another excess margin that publishings will be punished on: turnaround time from submission to sale.

    Absolutely no author wants to wait.

    Especially 12 – 18 months.

    • /blog Mike Shatzkin

      Yup. That’s a good one. I shouldn’t have missed it.

      Mike

  • JR Tomlin

    Here is where you lost me: “I make no secret that my view of the world is publisher-centric. I was brought up that way and I’ve spent 50 years learning about the book business with that point of view. ”

    Well, it isn’t 50 years ago. It isn’t the publishing world of TWO years ago and things have changed pretty radically. Publishers increasing their payments to authors would help, but that isn’t by any means the only problem and changing it won’t fix things. 

    The publisher stranglehold on distribution was what gave them most of their power and that is VERY rapidly ending. It is not likely to ever come back.

    • /blog Mike Shatzkin

      Jeanne, I don’t disagree that things are changing, but you’re living in the future if you think the big publishers aren’t important. They’re still selling most of the books. They’re still selling more books at $10 and $15 than most fledgling authors are selling at $3 or $5. And they still offer authors advances, sometimes very substantial advances, shifting the risk entirely to them. I know there are some authors, and you might be one, who are doing so nicely on their own that the death of the major publishers might as well have already happened. But it has *not yet *happened.

      Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        They’re still selling most of the books, yes. And most of the revenue because their books cost more, yes.

        But consider.

        In December 2010, the first self published ebook hit the Amazon top 100.

        By March, there were 37, and there have been 35 or more almost every week since.

        In July, a survey done of the top 1000 Amazon ebooks showed over 1/3 were self published.

        In October, my own survey of the top 200 Amazon ebooks in six popular fiction genres (romance, thriller, fantasy, science fiction, mystery, and horror) showed that over 50% of the top 200 ebooks in every one of those genres were self published. In one genre, it was over 70%.

        So yes, major publishers still sell the most books. But their market share has declined dramatically over the past year (even while their bottom lines have remained profitable, mostly due to larger margins on ebook sales).

        And authors are becoming more aware of this. As advances on genre novels slip steadily, professional writers are realizing that they don’t need a publisher to make that kind of money – and in fact, can often make more on their own.

        This is the real risk to publishers, more so than the Amazon publishing arms. Amazon can only publish so many books. But unless a given publisher makes their services very attractive to authors (as Amazon has) they risk losing their suppliers.

      • /blog Mike Shatzkin

        Kevin, what your stats don’t show, but what is germane, is the prices charged for these books.

        One Big Six executive told me that their biggest-selling price point is * $14.99*! Let’s not forget that the indies are selling what they are largely because of a price advantage. And the price advantage exists because the majors can still sell books for a substantial multiple over what unbranded books sell for. And they sell *lots* of them at those prices.

        I wrote a couple of years ago that bestseller lists ought to be computed on price times units so they record “box office”, not just unit sales. Your point constitutes evidence to me that my point was right.

        Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        They absolutely do sell lots at those prices. However – I believe they are selling a LOT less than they would be if indie books were not selling so well (and enormously less than they’d sell at lower prices). I’m not convinced that indie sales are a one for one loss for major publishers – I think the cheaper prices encourage buying and reading more books – but they must represent a significant loss.

        At the bottom line though? Amazon is simply acting how a publisher should act: cutting authors in on 2x the ebook revenue or more, responding to author queries in a timely manner, communicating with authors in a businesslike manner, not spewing out contracts with clauses which can shatter careers if not removed by an attorney during negotiations, and generally treating authors as business partners instead of replaceable widgets.

        It’s not *just* about the money.  ;)

        But assuming that other large publishers did the same – which they *should* – they’d do fine competing against Amazon’s publishing arms.

        But 2011 saw *hundreds* of professional writers move to indie writing. I strongly feel 2012 will see a greater flood. Often still selling to trade publishers as well, sure, but now flat-out refusing noncompete clauses, because people are publishing their own work as well. And if publishers balk on a contract change, it’s no longer a big deal – because the book is *getting published anyway*.

        The Amazon publishing arms are a change, but they’re small potatoes compared to authors simply not needing a publisher at all, anymore.

      • /blog Mike Shatzkin

        There’s no way to put the genie back in the bottle. There’s no way that publishers can control what books get distribution and only compete with the ones they’re willing to finance. So there will be a lot more to choose from, over time publishers will lose authors and lose market share, and over time prices will have to come down. I think that’s inexorable.

        I also think some of the practices you talk about that are odious are a relic of prior times when authors had no choice but a publisher deal. I think we’ll see a lot of them change. But to the extent they don’t change, you’re right that the publishers are complicating their own problems.

        There always were far more authors that couldn’t get through the eye of the agent-publisher needle than there were signed up. The difference today is that not getting signed is not a “final answer”. And there is also an alternative to the seemingly endless game of finding an agent and then having the agent get you a deal. But the bigger a book’s potential, the more likely I think it is that a publisher will be necessary to realize it. That might not be true in 2016, but it is still true today.

        Mike

      • /blog Mike Shatzkin

        There’s no way to put the genie back in the bottle. There’s no way that publishers can control what books get distribution and only compete with the ones they’re willing to finance. So there will be a lot more to choose from, over time publishers will lose authors and lose market share, and over time prices will have to come down. I think that’s inexorable.

        I also think some of the practices you talk about that are odious are a relic of prior times when authors had no choice but a publisher deal. I think we’ll see a lot of them change. But to the extent they don’t change, you’re right that the publishers are complicating their own problems.

        There always were far more authors that couldn’t get through the eye of the agent-publisher needle than there were signed up. The difference today is that not getting signed is not a “final answer”. And there is also an alternative to the seemingly endless game of finding an agent and then having the agent get you a deal. But the bigger a book’s potential, the more likely I think it is that a publisher will be necessary to realize it. That might not be true in 2016, but it is still true today.

        Mike

  • Joel Haas

    Just adding to Chris’ comment–turn around time for royalties with Amazon, etc. is one month, not 12-18, AND the accounting is much more transparent.  Really like  your take on the unearned advances and the fact higher royalties on ebooks would indeed earn out the books quicker.

    • /blog Mike Shatzkin

      It would be a really smart move for some big publisher to start paying royalties monthly for digital sales for all authors who have earned out. It would be a big pain to the royalty workflow, but it would be the right thing to do tactically.

      Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        Agree completely. There’s a bunch of things Amazon’s publishing arms are doing which are “new” in publishing but just sort of…well, they’d be automatic in most industries.

        The fact that publishers have *routinely* gotten away with contract-breaching payment practices as the normal day to day methods of businss for decades now wouldn’t fly in most industries, and frankly is probably coming to a crashing end in this one.

  • Anonymous

    Thanks, Mike. I like bottom line #3: Pay authors more. Paying less and less is less is a very bad idea indeed. Folks can say that there will always be writers who will take the contract…but what’s the long-term impact of this? I’d like to hear you discuss this more.

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  • Scott Nicholson

    I am always for more money from authors. But the value of an “advance” is now ridiculous when a popular author can self-publish and earn the equivalent of the advance BEFORE THE CHECK WOULD HAVE ARRIVED from the publisher. When you factor in the 12 to 18 months until publication, the author is basically losing money.

    I also think you are overestimating the “burden” of self-publishing on an author. Releasing Liquid Fear in April cost me $6 in development (plus trade for editing services), $250 in marketing, and sold 70,000 copies, but it has only begun life–Amazon’s Thomas & Mercer is reprinting it on Dec. 20. If I had submitted it it to an agent, I doubt I’d even heard a response by now.

    So the carrot of an advance is becoming a stick, an idea clung to only by those authors so steeped in tradition that they think they “need” the advance to “give them time to write the next book.” If you have the money coming straight to you without all the corporate gamesmanship, you have all the time in the world.

    Higher royalty rate is great, but unless you have a great digital marketing plan (like Amazon), a publisher is adding very little for the excessive cut it takes. Publishers will still snag a few authors who pine for “legitimacy” or to show their friends the two copies that manage to reach a bookstore shelf, but in an era that requires quick reaction and flexibility,  authors with the misfortune of being “published” will inevitably be in the worst shape.

    “Hmm, do I worry about how much money the publisher withholds against unearned advances, or do I watch the money dump into my bank account next month? I just can’t decide.”

    • /blog Mike Shatzkin

      Scott, I heartily congratulate on your success but I think it is snake-oil to suggest that any substantial number of authors would accomplish the same. And your characterization of the major publishers’ marketing compared to Amazon’s is a bit extreme. Amazon has released no evidence so far that their books have done appreciably better because they’re Amazon books. Laura Hazard Owen did some work tracking those books’ BookScan sales and found them very much lacking.

      I am not trying to say Amazon (and self-publishing) aren’t legitimate routes for many authors. But I think it a big stretch to suggest that anything like most authors upload their file to KDP and then just start cashing checks that would equal an advance (of unknown size) before it would have arrived!

      Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        I don’t think it’s snake oil at all… There are not hundreds, but *thousands* of indie books out there selling at rates which would exceed average advances from most publishers in a very short period of time.

        Are there lots and lots of writers who won’t make that much if they try to publish a book? Absolutely. A very high percent would earn zero from the old route, too, because their book wouldn’t be accepted in the first place.

        But as a rule, books which would sell well via one method also sell well via the other. That’s a real danger to publishers, because their authors don’t *need* them anymore. Failure to offer a good deal used to mean the author had to take it or not publish. Failure to offer a good enough deal today means the author walks and the book gets published anyway – and the publisher gets cut out.

        And I stress again: “good deal” is NOT just about money.

      • Chris

        “I think it is snake-oil to suggest that any substantial number of authors would accomplish the same.”

        Mike, my guess is that the authors that don’t accomplish the same are most likely authors that would never have gotten a traditional deal anyway.

      • /blog Mike Shatzkin

        We’ll have to part company on that one. If you think that quality is just as likely to be rewarded by self-publishing as by a publisher delivering, I just don’t agree. Of course, neither of us have any data to support our contention.

        Mike

      • Chris

        No, you’re right. In virtually every case a writer needs third party support on editing and design.

        And yet, many still make money without either of those things by self-publishing through Amazon. Which is quite remarkable really.

        What a great time to be a writer!

         

  • Howard

    Mike … have you lost your marbles ? :)

    Essentially you wants to fix the books so that publishers ‘look’ better, and the royalties they pay ‘look’ higher …. ?

    “call the consumer payment the top line revenue and the payment to the retailer a cost of sale.”

    As someone who has been in Financial Accounts for 30+ years in Europe, I find this quite bizarre. And I know that US Standards are very similar.

    Companies cannot just ‘change’ how they calculate their earnings/income. Either it is their income or it isn’t. There are rules for this kind of thing … think ‘enron’ ?

    The fact is that the price a consumer pays to the online seller (Amazon?) is the revenue of the seller. It is NOT the revenue of the publisher.

    The revenue of the Publisher … is what they actually receive ! That is why it is called their revenue.

    Let’s say I sell apples to the corner grocery store for €1 and he sells them to consumers for €3.  I cannot then just choose to list my sales as €3, with a balancing cost of €2 described as “retailers cut”. Who came up with this crazy stunt ? 

    This is a proposal for a totally false accounting manipulation that would create a complete false financial picture of the business.

    “I make no secret that my view of the world is publisher-centric.” … Hey Mike, at least you are open about it .. this is carrying it a tad too far :)

    • /blog Mike Shatzkin

      Howard, I haven’t lost my marbles. They’re in far plainer sight than your logic or civility.

      The *publisher* is the seller, not the *retailer* under agency. The publisher is entitled to book the total revenue.

      It isn’t my fault that Wall Street looks hard at top line revenue to the exclusion of some logic nor that trading partners look at the percentage margin as a determinant of strategy. But they do.

      Your example of selling apples to the grocery store describes the wholesale model, not the agency model. Of course, you probably think the agency model is price-fixing (like the Europeans who are now “investigating” it.) Perhaps that position will become the law. If it does, we won’t have to worry about any of this anymore because Amazon will be making all the rules for our business.

      Mike

      • Howard

        Mike … “civility.” I suggest that was a bit unfair.

  • http://twitter.com/Kennectto Kennectto

    Choice is good for the buying public.Hope ‘traditional’ publishers realize this too! The creator} or author of a work has never gotten his /her fair share of profits from traditional publishers.So here’s to self published writers! Get your best deal possible.

  • http://www.facebook.com/profile.php?id=1736483685 Eric Welch

    I’d get rid of advances which terribly distort the market and pay all authors 50% of the “net” revenue. Advances take money from deserving authors who can’t get published because they haven’t achieved that mythical celebrity realm. I suspect most of even the big authors never earn back the advances.  Publishers and booksellers also need to eliminate the returns option.  That also distorts both the number of sales and gives a distorted picture of actual sales. It also inhibits booksellers from trying to accurately reflect what they need. Give larger discounts but allow no returns. No other business runs this way and it drives up the cost of books. In this day of computers and instant communication, not to mention faster shipping and printing, that change alone would bring huge savings. The New Yorker years ago had a great piece on the business of publishing and how advances are “accounted for,” making it almost impossible for a 10,000 book author with good reviews, to make a living or get published again.  As far as accounting rules, it’s accountants who made Enron, MF Global, and the recent financial collapse possible.  They’re really good at creating CDOs and CDSs and booking future revenue as current, hiding things under the guise of GAAP.

    • /blog Mike Shatzkin

      Eric, changes in terms require that trading partners agree. There is no way that big authors will agree to no advances at almost any level of royalties and there is no way that major retailers will agree to no returns without punitive levels of additional margin. Whatever the virtues of your notions, they ain’t gonna happen.

      Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        Respectfully disagree. In fact, many authors are already agreeing to no advance publishing, if the royalty rate is high enough. As we chatted about before, Ridan is offering 50% of list for writers, and can afford that because they carry less risk because they do not pay advances. And, of course, self publishing is itself a form of no-advance publishing – so we know that plenty of writers will hop on board without advances, if you offer a high enough royalty.

        The question is therefore not *will* authors do this, it is how low can the royalty rate go before authors balk at not having an advance? Obviously, 35% of list is too low – Amazon and numerous small presses already offer that *with* an advance. And just as obviously, 50% of list is acceptable, at least to some writers, if there is significant additional value being added by the publisher in other ways (superb marketing efforts, for example).

      • Chris

        I dunno, Kevin. 

        I bet the top authors are very reluctant to turn their back on their advances.

      • /blog Mike Shatzkin

        In fact, there has been a grand total of *ONE* author who has publicly declined a substantial advance to self-publish. His name is Barry Eisler and, in the end, he decided not to self-publish but instead to take a hefty advance from Amazon. So the grand total who have actually given up advances for self-publishing on the public record is *ZERO*.

        I think there will be a few of these over the next couple of years, but there actually hasn’t been one yet. Birds in hand are highly favored.

        Mike

      • Chris

        There’s a $3.75 million farm in the hinterland near me … boy, would I like an advance to cover that.

        Wish I actually had a potential international bestseller to shop around!

        What I do have is a self-indulgent regional memoir. 

        I’m banking on $375/month via Amazon. Sad, I know!

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        Well, the biggie was Joanne Rowling, of course, but we don’t know HOW big an offer she turned down for her erights in order to self publish those boy wizard books, since she didn’t publicly announce it. But…I think we can assume it was probably pretty big.  ;)

        She’s not alone, though. If you think about it, every bestselling author who’s self published anything is, in essence, turning down an advance. And there’s been quite a few of those.

        But that’s not really what I was talking about. There’s quite a lot of interest in Ridan’s model – with one of the highest advances in the industry but zero advances. Push the author percentage up high enough, and I think you’d be surprised how many writers get interested.

  • Patseibel

    “Reporting ebook sales as they do, publishers are achieving about 75% margin on ebook sales (because they give 25% of the take to the author.) ”

    I’m puzzled… are you implying that the only cost publishers have when producing/selling eBooks are authors’ royalties???
    This is sooo far from the truth! 
     

    • /blog Mike Shatzkin

      No, I’m saying the margin contributed by each ebook sale is 75% of the selling price. Margin addresses fixed costs (editing, design, cover creation) and then overhead. Margin is not the same as profit.

      Mike

  • http://www.facebook.com/profile.php?id=1736483685 Eric Welch

    I suspect that agency pricing would have been illegal under Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911) but since it was overturned by Leegin Creative Leather Products, Inc. v. PSKS, Inc. in 2007., I fear the current court may approve of vertical resale price maintenance.

    Brief quote from the Wikipeadia article:  “Several decades after Dr Miles, scholars began to question the assertion that minimum resale price maintenance, a vertical restraint, was the economic equivalent of a naked horizontal cartel. In 1960, Lester G. Telser, an economist at the University of Chicago, argued that manufacturers could employ minimum resale price maintenance as a tool to ensure that dealers engaged in the desired promotion of a manufacturer’s product through local advertising, product demonstrations, and the like. Without such contractual restraints, Telser said, no frills distributors might “free ride” on the promotional efforts of full service distributors, thereby undermining the incentives of full service dealers to expend resources on promotion. Six years later, Robert Bork reiterated and expanded upon Telser’s argument, contending that resale price maintenance was simply one form of contractual integration, analogous to complete vertical integration, that could overcome a failure in the market for distributional services. Bork also argued that non-price vertical restraints, such as exclusive territories, could achieve the same results..”

    • /blog Mike Shatzkin

      I don’t know the law and I admit to the suspicion that lawyers and courts can come down wherever they want to in any dispute and make a convincing case that the law is on their side. (Ignorance often breeds paranoia and I’m no different than anybody else.)

      But I do know a thing or two about the publishing business and I’m pretty sure the only sure winner if agency is eliminated is Amazon. It also happens that Amazon is the dominant retailer for both print books and ebooks. Strengthening the dominant player doesn’t strike me as the best way to achieve an active and thriving marketplace.

      Mike

      • http://www.facebook.com/profile.php?id=1736483685 Eric Welch

        That’s precisely the argument made by large manufacturers who don’t want to see any price competition, arguing that it devalues their product and hurts the little guy by letting the big guy (e.g. Walmart) undercut him on price. I don’t remember any protests from publishers when B&N and Borders were undercutting smaller bookstores with loss-leading discounts. The only way out of this paradigm is for a totally non-competitive environment where the manufacturer sets the price and no one can undercut it.  The fact is that Amazon makes more money under the agency model – a guaranteed 30% – whereas before they were losing money on loss leaders in hopes of making it up on other books they priced much higher. That’s the nature of the retail business and is certainly the model used by all the successful retailers out there.

      • /blog Mike Shatzkin

        Somebody earlier — here or elsewhere, I can’t remember — cited some case law where a manufacturer’s ability to enforce a price (by stopping distribution to outlets that broke price) was justified because it allowed smaller retailers a crack at the market. I don’t know exactly how Apple does it, but when was the last time you saw somebody offering a cheap iPod or Powerbook?

        Mike

      • http://www.facebook.com/profile.php?id=1736483685 Eric Welch

        Exactly, but I would argue the publishing world is very different because as you and others have pointed out, authors and agents can now create their own distribution networks for their content to the exclusion of publishers who formerly controlled the distribution to bookstores.  It used to be very difficult for those not published by the big six to gain access to that network.  Only Apple makes Apple products so they, through patent law, etc., can control to whom they will sell their product and hence control price. The difference is that any retailer can compete with Apple by selling Android products (which now outsell Apple OS products.) Apple gained market share (now slipping) through marketing.  Marketing books, I submit, is a very different proposition.  I’m not really disagreeing with you except to suggest that the publishing industry is trying to maintain control over a distribution system that *may* no longer have any relevance and either they figure out a way (perhaps by paying authors more as you suggest) to have some control over distribution of their product or they will find themselves in the same fix as the music industry.  They are at a huge disadvantage with others because they must support a substantial infrastructure. Other paradigms are emerging.  I’m betting on them.

  • http://www.facebook.com/profile.php?id=1736483685 Eric Welch

    A question:  Doesn’t the agency model really help Amazon more than the publishers in the long run since it eliminates competition at the point-of-purchase end?  If I know that the price is controlled by the publisher, why would I ever want to look at Kobo, B&N or iBooks?  The price will be the same on Amazon which provides a great interface and delivery system.  There’s no incentive to look elsewhere.  This just makes Amazon stronger.

    • /blog Mike Shatzkin

      Eric, that’s one way to look at it. But I don’t think that is how Amazon looks at it. They could very quickly make agency pricing the industry standard if only they would give publishers beyond the Big Six the ability to sell through them that way. But they won’t do it. Clearly, *they* think it is important to be able to cut prices and compete on that level. And I suspect that with bots and automatic price change algorithms operating, it is very unlikely any price lower than theirs for any book selling substantial numbers gets matched *very* quickly.

      Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        I agree completely with Mike, here. Agency pricing is to B&N’s advantage, and Apple’s advantage – because without agency pricing, Amazon would simply undercut them like mad on enough key books that they’d quickly control more market share than they already do.

        (Although it’s worth noting that in the long term, loss of agency pricing has the potential to hurt Amazon as well – as they’re growing big enough, bulky enough now that a few college kids with good marketing brains could, were agency to go away, start selling books basically at cost, and in theory compete very well against Amazon. That’s an important thing to remember about digital books: effectively zero cost to the retailer means that technically, a retailer could eventually spring up giving the books away for whatever the publisher is charging, earning zero profit from selling books and making money from banner ads or something instead. Short term, agency is hurting Amazon – but long term, it protects Amazon as well as B&N and the others from what potentially COULD be coming…)

      • /blog Mike Shatzkin

        Kevin, Amazon is perfectly happy to sell ebooks for under cost. They do it all the time. No kids in a garage are going to compete with them by selling banner ads. Amazon has lots of ways to recoup expenses (including banner ads.)

        Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        No, Amazon underpriced wholesale for *some* books, mostly high profile bestsellers, to attract attention and draw market share. They used those books as loss leaders, and made money on their other books (still discounted, but not as much).

        The theoretical limit (if agency goes away) is to charge wholesale cost (or even perhaps a bit less) for *every* book. That’s possible because with digital retail overheads, a retailer can add zero cost to a product and still make money through other revenue channels.

      • /blog Mike Shatzkin

        Kevin, my only point is that Amazon has both the deep pockets and the other monetization capabilities to outgun anybody trying to steal the ebook business from them. And that’s quite aside from their fantastic customer experience which two guys in a garage would have to work very hard to match, if they could do so under *any* circumstances.

        Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        Amazon started basically in a garage, Mike.  ;)  I have learned to never underestimate people with brains and a garage.  ;)

        The main point I was trying to make is not who will make the change – but that it is retail itself which is at risk, and being protected by the agency system. If a nimble enough company could make a good ebook sales site and give books away at wholesale, Amazon would have a hard time competing with that. Amazon has deep pockets – they’d fight. Amazon can convert to other forms of monetization, but they’re a big company now, and they can’t afford to run on a tiny bit like they once could.

        I try to always look at the *possible* limits to what something can be taken. The actual might not reach that far, but I find that it often comes closer than most people think. And I also find that tends to be where the newest game-changing innovations live.

      • /blog Mike Shatzkin

        Amazon started in a garage. Google started in something close to a garage. Perhaps eBay did too. But I wouldn’t try competing against any of them from a garage now.

        I would never dismiss the possibility of an upstart disruption. But I do think, in this case, that it is unlikely. At least anytime soon.

        Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        Can’t resist, although the comment spot is getting very narrow now! =)

        We’re not talking about *competing* with Amazon here now, though. We’re talking about creating a similar but disruptively different service which would have the side effect of making life hard for Amazon.

        Like Amazon did for brick and mortar booksellers.

        And I’d bet good money whatever does initiate the next disruption comes out of a ‘garage’, or something similar. That’s where the hungry ones always come from…

      • /blog Mike Shatzkin

        Kevin, I may just be thick, but I’m not getting the distinction between what we’re talking about and “competing”.

        Mike

  • Patseibel

    Yes, I know, Mike.
    But why are not subtracting the fixed costs then, just the royalties? Or I’m missing something in your calculation?

    • /blog Mike Shatzkin

      I can’t subtract the fixed costs because we don’t know what they are: they vary by book. And because the *margin* is what the agents and accounts would be looking at to decide if the deal is fair, and that’s the point of that part of the story.

      Mike

      • Patseibel

        I do understand the premise.
        However… 
        Right now a lot of eBooks are just a digital version of the printed product – many of them, it has to be said, full of typos that would not be allowed in a printed edition. But even these versions incur in costs that did not exist before (DAM systems, metadata production, conversions, file testing etc). As eBooks evolve and publishers are forced to invest in infra-structure and expertise to make the transition to digital and keep relevant in this new digital world, some costs should increase – quite a lot in some cases. I don’t think all these should be neglected by authors, agents, readers… anyone really. There is a danger of people (who are not directly involved in the publishing process) perceiving eBooks as a derivative cost-zero product in relation to the print book. And once that has stuck in their minds…

      • /blog Mike Shatzkin

        Without disputing the logic of anything you said, it’s not responsive to my point. The investment community *does* place an outsized premium on the direction of top line revenues. The agents and the trading partners *do*look at the margin on sales (throwing out all those other costs that are
        not directly related to the sale) in their strategy and in their explicit conversations about how to split up the take. That’s what really happens. Trade terms and author contract boilerplates notwithstanding, I was trying to focus on what the people doing this negotiating are focusing on. That’s what I was writing about.

        I frankly think any connection at all between how things are discussed and perceived in the community of this blog and the understanding of the general public of these matters would be purely coincidental. The economics of the book business are extremely complicated, as your comment makes abundantly clear. That’s especially true in a period when the shift to digital is taking place and when all formulas and strategies have to be based on guesses about the speed of the changeover and how far it will go before it slows down.

        Mike

      • Patseibel

        “The agents and the trading partners *do*look at the margin on sales (throwing out all those other costs that are not directly related to the sale) in their strategy and in their explicit conversations about how to split up the take. That’s what really happens.”
        I understand your point. I seem to forget that you are talking from a trade US-UK publisher perspective sometimes, sorry.
        Although I work in the UK publishing industry, I come from a country where just a minority of published authors have agents – which is a reality in most countries, btw – and where royalties negotiations with both authors and agents take into account a lot more factors (icluding the costs), not focusing mainly on the margin.
        Not saying this is right or wrong. Just pointing it out. 
         

      • /blog Mike Shatzkin

        Yes, what is written here is primarily from a US perspective with a bit of UK knowledge thrown in. The conventions in other countries aren’t seriously taken into account. We are all prisoners of our own experience. And knowledge.

        Mike

  • http://www.kevinomclaughlin.com Kevin McLaughlin

    OK, Mike, the comment bar was down to about 5 characters wide on my screen, so I’m starting fresh here. ;)

    You said “Kevin, I may just be thick, but I’m not getting the distinction between what we’re talking about and “competing”.”

    You’re not being thick; I’m probably not explaining well enough. I think there’s a difference between a business which directly competes (ex. Borders w/ B&N) and a business which by its nature creates a disruption for another business.

    Example: Fire vs iPad. Most people agree that the Fire does not compete directly with the iPad. It’s not in the same market. And yet it’s disruptive – we see Apple cutting iPad orders and talking about cutting iPad prices, and some of that has to do with the 3-5 million Fires Amazon expects to sell in Nov/Dec.

    Amazon is fundamentally a retailer. A company which “sold” ebooks at wholesale, making no money on each sale of every single book, wouldn’t be a retailer. They’d be something new, something disruptive, and a business along those lines could put a serious dent in Amazon’s market share.

    Suppose the Justice Dept rules against the agency pricing next month, and everything goes back to wholesale. I start this business the next day. Suppose I go chat with various big publishers, who, you know, aren’t really that thrilled with Amazon right now, and would get more nervous without agency pricing. I get some venture capitol to build a rocking web store. I get the publishers on board to sell ebooks through me, at regular wholesale prices. I then sell those books to customers at the same price. Publisher still gets every cent of their income. I make money by selling ads on banners, and through product placement for various publishers like brick bookstores and Google do today.

    It’s not retail anymore. It’s…something different. Something which is still getting product to customers, but is no longer taking a share of the profit on those sales. It’s making money through other means. So no, it’s not directly competing with any other retailer, because it’s something new… But yes, it would completely disrupt their businesses, because they simply wouldn’t be able to match the prices available. Not consistently, not across all published work – because they are structured to demand some level of profit from their retail sales.

    • /blog Mike Shatzkin

      You really did have to explain that because you’re inventing your own paradigm here.

      What you call “not a retailer, but a disruptor” I’d say is a “retailer with a different business model”.

      But whatever you call it, I don’t think it will work. I hope the condition you describe for its creation (the law overturning agency) just doesn’t come to pass.

      Mike

      • http://www.kevinomclaughlin.com Kevin McLaughlin

        Well, a retailer is usually someone reselling goods which they acquire at one price for a higher price. If you’re distributing goods but not making money from them, I’m not sure what you call that.

        Anyway – not sure that particular model would be the breakout one. That’s an extreme example of a possibility, which I was trying to use to illustrate that the agency pricing protects all booksellers from potential disruptive changes. Amazon too.

      • Chris

        Kevin, there is nothing stopping you doing everything you suggest right now. Why not sell books at whatever price point the publisher suggests? Why not support the store through ads?

        The problem is one of user experience.

        Bezos built a barrier to entry because he made the kindle. Now there are millions of people with kindles who will never want to manually add a title to their device. They want it to sync. Actually, they don’t even know that they want it to sync. They just want it appear on the device because that’s what they are used to.

        That’s an almost impossible market to break into now. Unless you try something completely different. But I think it isn’t ad-supported UI with wholesale book prices. I think it is far more extreme. Either ad-supported free. Or niche subscription. 

        I can’t see anyone being a ‘wholesale’ challenger to the paid market that Amazon excels at.
         

    • Chris

      Re: threaded comments. 

      mike, you should get your blog administrator to look into a new format for the comments. Maybe ‘IntenseDebate’.

  • Chris

    No publishers on here disagreeing with your royalty increase suggestion, Mike!

    Maybe your blog is turning into a haven for self-publishers?

    Imagine if someone said to you ten years ago that self-publishers would rob several hours of your attention each week.

    “Yeah, right… and ebooks will outsell print in 2012.” :) 

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  • http://go-to-hellman.blogspot.com/ Eric Hellman

    It’s interesting to consider the case of the journal publishers transitions to e-journals as an analogy to today’s transition to ebooks. I started an open access e-journal in 1996, and would never have thought that the incumbent publishers would survive. In retrospect, their survival rested on 3 leags, and I think you focus on only one leg.

    1. The journal publishers retained the loyalty of the authors. You got that right, and I agree with your conclusions.

    2. The journal publishers retained the loyalty of their customers, the libraries. Although this relationship has been straining almost forever, it has never broken, partly because of a codependence of libraries with the academic publishers. The analogy with ebooks is difficult, because book publishers have only tenuous relationships with people who buy books. Amazon, by contrast, has very strong relationships with people who buy books.

    3. The journal publishers invested huge sums to become good at publishing e-journals. Underfinanced open-access publishers never got far enough ahead of the big publishers to close the deal with authors and readers. In my e-journal days, I expected that the mechanics of publishing would get easier and cheaper, but if anything they got harder. And the reason can be expressed in two words: “Microsoft Word”.  The implication for ebook publishing is that publishers must invest the money to become better and more efficient at ebook production than Amazon.

    • /blog Mike Shatzkin

      There’s another piece to the journals puzzle. Having the entire history of the journal available as a searchable electronic product delivers more value to the library and the scholars than it did in paper. And both the library and the publisher know the usage. These aspects have no analogue in the trade business.

      Mike

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  • InklingBooks

    Those who want to make life more difficult for Amazon should point to it’s outrageous download fees–some five times what cellular data charges are. On my two latest ebooks, it lowers the royalty I get to only about 55% versus 70% from Apple.

    I know that and can steer readers to buy from Apple. But all too many authors and publishers look only at that bank deposit they get. Being larger, their Amazon payment is greater, so they don’t notice that the per sale amount is less.

    It’d actually make sense for someone to test Amazon’s response by pricing their Amazon ebooks high enough that the royalties they get are closer to what they get from other retailers. Will Amazon match the price at other online stores, and if so, will they pay less or more

    • http://idealog.com/blog Mike Shatzkin

      There are definite commercial risks in pricing what you sell to what you acknowledge as the volume leader higher than to your other customers. I’d be very wary of that strategy, and the bigger I am as a publisher the more wary I’d be.

      Mike