royalties

There has been a lot of discussion about ebook pricing lately. I did a post following Motoko Rich writing about this in the Times, but Rich’s post itself was a sign of the discussion taking place, not the catalyst for it. Today in Publishers Lunch, Michael Cader runs through some calculations to demonstrate that when publishers shed the costs of printing the books they sell as well as the costs of warehousing them, printing books they don’t sell, and handling returns on books they thought they’d sold, they can reduce retail prices by 40-50% and still be taking in the same number of margin dollars.

Cader points out that there is a different problem of unintended consequences: if a lot of business shifts to ebooks, then the critical mass requirement for many brick-and-mortar stores might not be met and we’ll develop a downward spiral of printed book exposure and sales. That’s an accurate point, but I can’t see too many people trying to slow down the growth of ebook sales to address it.

We have suggested here that publishers should be reducing the discounts offered to retailers because, as much as publishers’ costs go down moving from print to digital, so do retailers’. And because retailers have a (sensible) penchant for turning excess margin into consumer discounts, the discounts being offered lead to a very tenuous situation for publishers. Many retailers are living with just the margin they probably need, but they’re doing it voluntarily.  The low price the consumer is getting is because of retailer policy, not publisher policy. If the publisher sells downloads directly at the same price, the retailer is (justifiably) going to say “hey, the discount you offer me is supposed to be off the publisher’s price, so if you sell at discount, don’t you owe me some money?

The widely-remarked on Amazon Kindle pricing underscores this point. Amazon is buying ebooks (for the most part) at 50% of the publisher’s suggested retail. But then they’re giving away much of, all of, or even more than that margin to give the consumer a lower price (often the billboard price of $9.99.) Nobody expects Amazon to sustain this sell-at-a-loss strategy forever. And few expect Amazon to raise prices to the consumer. That leaves one alternative: use the leverage of all those Kindle owners to get reduced prices from the publisher.

And that’s why, in their own interests, publishers have to reduce retail discounts across the board.

Authors are facing a different margin pressure. Publishers generally find it easier to reduce the author’s take than the retailer’s so, even before putting pressure on retail discounts, they have been reducing author royalties. Just a few years ago, there was bold talk from the author side that a 50-50 split of ebook revenues between publisher and author made sense. But it seems that the “standard” for ebook royalties has settled in at 25%, or even 15%, of publishers’ receipts. Since discounts are about 50%, that amounts to 7.5% to 12.5% of retail, which is hardly a bonanza for the authors. And remember, many informed voices are clamoring for that suggested retail price for ebooks to come down!

It is because the market is young and the flux is still great that I suggest that publishers should be rethinking intermediary discounts. For the same reason, it is also time for authors and their agents to be rethinking the royalty rules. Expressing royalty as a percentage of either retail price or net receipts is a concept that makes a certain amount of sense in the physical world, where the cost of manufacturing creates an anchor for pricing. There is a certain minimum price below which publishers won’t go when they have to pay to print books. And bigger, fatter books, which cost more to print and would drive up both retail price and royalty, also imply a greater contribution of IP by the author. 

But in the virtual world, perhaps it would work better for everybody if authors negotiated to get a flat number of dollars (or cents) per unit sold. Publishers should really have no problem handling this: they’ve been working with pricing with a known cost-of-goods higher than zero for a very long time. And, for authors, it would eliminate the possibility that diminishing ebook prices will lead to royalties which by historical standards are laughable and for an author trying to make a living are unsustainable.

This practice will probably arise when agents see the need to negotiate a mimimum dollars or cents royalty per ebook sold to protect against overly-aggressive promotional pricing, which is already proving to be a temptation for publishers with no physical cost of goods and with author royalties that decline with price. With Scribd offering 80% of the retail price and Smashwords offering 85%, authors will calculate very quickly how low their prices could be to yield the same return (or maybe, twice as much return) for each copy sold than what is the standard offering now. When Scribd and Smashwords files are as easily secured for the iPhone as anybody else’s, the agents will have a very hard time convincing their authors to accept things as they are.

Posted this originally without a reminder about Thursday, May 28 at BEA: “Stay Ahead of the Shift.” AND there are two panels I’m moderating you’ll want to see. On Thursday at 3, Brian O’Leary, Laura Dawson and I are doing “XML for Editors.” And on Friday morning at 9:30, I’ll moderate “Digital Debuts Tool Time” with the leaders of at least three great new propositions on the stage with me: Hugh McGuire of BookOven, Mark Coker of Smashwords, and Peter Clifton of Filedby.

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I just want to riff briefly on a challenge; I am still thinking about what might be a solution, or even an approach to a solution.

Here’s the challenge. We need some creative dealmaking between authors and publishers. The partnership is getting more complicated.

Publishers (will always) need authors and (most) authors (still) need publishers. They have to work together in a way where their interests are aligned.

In the world we grew up in, the royalty and rights-sharing book contract mostly accomplished that, although not perfectly. International rights and sales of the English language edition  are a challenge, for example, because standard deal terms and practice have often  made it more profitable for authors to have their rights sold to local publishers  in each market (whether they do it themselves or have it done by the originating publisher and share the royalties) while it is more profitable for publishers to keep the book within their company if they have a global presence, even if they sell fewer copies in many markets. 

There’s also an “end of life” issue where publishers’ and authors’ interests don’t match. Because publishers extend almost all of their marketing efforts to about-to-be or just-published titles, a book that has slowed down to a crawl after it has had its run is very seldom going to get back up and run again at the publisher that owns it. But a new publisher, with new interest — even if it were a smaller and less powerful one — can sometimes  generate new sales.

For years we’ve had as a default an out-of-stock trigger, by which an author can notify a publisher if the book is out of stock (which in and of itself seems a bit crazy) and then, if the publisher doesn’t put it back into stock, it is considered out of print and rights will revert. If a publisher is holding substantial stock on a book, they might remainder it and put it out of print themselves. (The remaindering seldom yields any revenue for an author, by the way.) Or they might not. And if the publisher is holding very limited stock, there’s no incentive to kill the book and the publisher might happily fill 10 or 20 orders a year until the stock runs out.

Over the years, savvy agents have negotiated more stringent arrangements, such as a reversion of rights when sales go below a certain number, say 200 a year. Big publishers have often agreed to something like that because those sales would be insigificant to them. But there’s an increasing reluctance to do that now because print-on-demand offers the ability to keep every book available forever without inventory and the long tail and electronic life online present the possibility of even more revenue. This is probably going to become an increasingly contentious “small point”. 

This is complicating life from what it was before, but it’s not a sea change, it’s a tweak. Here’s the real challenge.

Publishers are in the process of discovering that we’re in a shift from a product-centric world to a community-centric one. The new challenge arises from the fact that it is simple to pay royalties for sales of a product; it is a lot harder to pay somebody for their contribution to a community. Here’s a real-life example.

A publishing friend asked me a couple of years ago how to make the best possible digital use of a science fiction encyclopedia he was publishing. Since I am (self-)”trained” to think “content is bait to attract community and community is what you need to survive”, I had a ready answer:

“Put the encyclopedia on a dedicated science fiction community web site for free. That will bring you the traffic you want regularly. Then turn the encyclopedia into a wiki available only at a registration layer. Those who register can improve and grow your encyclopedia. Material can ‘graduate’ to the openly-available free layer either by vote of the community or by decision of the editors. And, by the way, you’ll get lots of great content for the next edition.”

Great idea, don’t you think? But it couldn’t work. The publisher had secured online rights to the content by agreeing on a revenue split with the authors for it. So if it was to go on the web, it had to be a “subscription” product, with attributable revenue, or they couldn’t do it.  Of course, a subscription to a static web product is not likely to be the most commercial proposition. 

This really requires a new kind of deal for the authors, giving them a piece of the developing sci-fi community. I am not sure how else you could reward them fairly, because the publisher really would be using their content as bait to create something larger. But since the publisher himself wouldn’t yet have a clear view of how the community will be monetized (and neither do I, by the way), that’s a hard deal to make. But it would defnitely be in the author and publisher’s best interest to find a way to collaborate this way.

The end of this story is pretty predictable; only the timetable is in doubt. There will be a sci-fi community on the web (there are many right now, some built around book publishing imprints) that will create its own crowd-sourced sci-fi encyclopedia, perhaps springboarding off work wikipedia has already done. When that happens, not only will that site get the benefits I was suggesting my friend’s house could get, the published encyclopedia will stop selling nearly as well in book form too. And if there is still a market for such a product as a book, they’ll suddenly have strong competition from something that can be created from the website. In fact, people would be making SharedBook copies of it.

We need to work out a better answer. Maybe dividing the profits on the SharedBook edition(s) could be a start.

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