The Shatzkin Files


The royalty math: print, wholesale model, agency model


I have been helped in trying to parse the ebook royalty question by a numerate agent. While he helped with me the methodology, the numbers that appear in the tables below below are my responsibility. I hope that arraying the information this way will help everybody think through the question of ebook royalties with more precision. This is a subject we’ll have a panel talking about at Digital Book World Conference in January.

I want to think about this philosophically (I like to think about everything philosophically), but this post is about establishing a framework of understanding about what the real economic implications are, for the publisher and the author, of today’s sales practices and division of revenue. So this is pretty much a “just the facts, m’am” post.

We created three sets of tables: one to compare ebooks to hardcovers, another one comparing them to trade paperbacks, and the third comparing them to mass-market paperbacks. Because of the reports following the Random House-Wylie announcement that suggest that ebook royalties, at least on some backlist, might hit 40%, we have calculated how they work out under both the wholesale model and the agency model with the author getting 25% of net and with the author getting 40% of net.

Here’s the key to understanding the columns. For each grouping, we placed print on top, followed by two rows for 25% royalty (wholesale model and agency model), with the last two rows calculated at 40% royalty (wholesale model and agency model.) The retail price is the one the publisher establishes; the net is what they get from the channel partner for each unit sold. The cost is an estimate of print cost (10% of retail plus 25% for obsolescent inventory) or the unit cost of an ebook sale (50 cents in all cases, primarily to cover DRM.) The margin is simple subtraction of the cost from the net. The royalty rate is self-explanatory. The author royalty per unit is calculated from the rate and the price or net, as applicable. And the last column shows the percentage of the total margin that is claimed by the author at that royalty rate.

We did not factor in the cost of digitizing ebooks; nor did we include the cost of typesetting and page makeup for print books. Since we’re focused on royalties that would be paid after earn-out, the assumption is that those costs have already been amortized.

 

Hardcover

Format Retail Net Cost Margin Royalty
Rate
Author
Royalty
Author %
of Margin
Print $26 $13 $3.25 $9.75 15%
of retail
$3.90 40%
Ebook – Wholesale $26 $13 $0.50 $12.50 25%
of net
$3.25 26%
Ebook – Agency $13 $9.10 $0.50 $8.60 25%
of net
$2.275 26%
Wholesale at 40% $26 $13 $0.50 $12.50 40%
of net
$5.20 41%
Agency at 40% $13 $9.10 $0.50 $8.60 40%
of net
$3.67 42%

 

Trade Paperback

Format Retail Net Cost Margin Royalty
Rate
Author
Royalty
Author %
of Margin
Print $15 $7.50 $1.875 $5.625 7.5%
of retail
$1.125 20%
Ebook – Wholesale $15 $7.50 $0.50 $7 25%
of net
$1.875 27%
Ebook – Agency $10 $7 $0.50 $6.50 25%
of net
$1.75 27%
Wholesale at 40% $15 $7.50 $0.50 $7 40%
of net
$3 43%
Agency at 40% $10 $7 $0.50 $6.50 40%
of net
$2.80 43%

 

Mass Market Paperback

Format Retail Net Cost Margin Royalty
Rate
Author
Royalty
Author %
of Margin
Print $8 $4 $1 $3 10%
of retail
$0.80 27%
Ebook – Wholesale $8 $4 $0.50 $3.50 25%
of net
$1 29%
Ebook – Agency $8 $5.60 $0.50 $5.10 25%
of net
$1.40 27%
Wholesale at 40% $8 $4 $0.50 $3.50 40%
of net
$1.60 46%
Agency at 40% $8 $5.60 $0.50 $5.10 40%
of net
$2.24 44%

 

Here are a few things that jump out at me as I look at these numbers.

1. In the print world, authors are getting a much bigger share of the margin for hardcovers than they are for paperbacks.

2. Although it is true that an author gets a much bigger royalty on a hardcover under the wholesale model than under the agency model, that is not true for paperbacks. The ebook royalty for a trade paperback equivalent is quite close in the two models, although wholesale still yields more. But in mass-market, the author actually gets significantly more under the agency model than they do under the wholesale model!

3. The author suffers a real shortfall in revenue for each copy sold in hardcover at the prevailing 25% royalty. However, the author makes more money on each ebook than they do on each trade paperback or mass-market paperback.

4. Our margin calculations are strictly cost-of-sale based and include no calculations for overhead. Looking at these numbers, one can see why publishers believe, at least on paperbacks, that the 25% royalty is more than fair. (The author is getting more per copy sold and the percentage of the total margin they’re getting is as good or better than for a paper edition.) While we’re in a time where digitizing for epub is an extra step, not a simple alternative output of an XML-based pre-press process, the ebook seems freighted with extra costs. But in the longer run, that won’t be true. Ebooks should put less strain on overheads and require less of an organization to support them: no warehouse, no cash tied up in inventory, no need to monitor stock in the warehouse and in the supply chain.

Looking at these numbers it is easy to see why publishers are fighting to hold the line on ebook royalties. But ultimately the determination of what will work will not be based on what is fair or equitable; it will be be based on what the market says is the right level. That will be worth exploring in another post.

  Back to blog

  • http://librosenlanube.blogspot.com Julieta Lionetti

    Hi, Mike.

    Thank you for another timely post.

    I'm guessing if “wholesale” is applicable to something that you cannot sell in bulk because it's only a file, not a thing.

    • /blog Mike Shatzkin

      Julieta, “wholesale” refers to the “wholesale model” of sales as opposed to
      the “agency model” just invented. I have written lengthy explanations of
      this but, in short:

      The wholesale model imitates what we do with print books. The publisher sets
      a “notional” retail price and sells to the channel (bookstores and
      wholesalers) at about half that price. Then the bookstores set their own
      price to the customer. Ebooks have been transacted that way, like print
      books.

      The agency model was introduced when Apple opened the iBooks store in April.
      Under agency, the publisher sets a firm price to the consumer which the
      retailer cannot change. The retailer then remits 30% of that price to the
      publisher for each book sold.

      So under wholesale, the publisher gets half; under agency, they get 70%.
      Under wholesale, the publisher sets unrealistically high retail prices
      counting on the retailers to discount (which they usually do, since they
      have plenty of margin.) Under agency, the publisher's price is the real
      price to the consumer, so it has to be reasonable.

      Of the Big Six publishers in the US, Random House is the only one that has
      resisted the agency model. That's why I wanted to show the comparison
      between how much authors get between the two.

      Mike

      • Kassia Krozser

        Mike — just a point of clarification for me. Which publishers calculate ebook royalties on the wholesale model (which is the more sensible calculation) versus the retail model? I've heard from authors who indicate they are paid on the retail model for major publishers; wholesale for others.

        Other note (you know I'm a royalty geek, and, yes, I know this is a basic calc, so this may not be relevant for the example). Last I heard, how publishers were treating commissions for Agency titles was an open question — some were thinking of calculating royalties on the net, some weren't. Based on the contracts I've seen, commissions are deductible, but the publishers were on the fence. This may have changed.

        (Also, that obsolescence number is scary high but not surprising.)

      • /blog Mike Shatzkin

        That obsolescence number isn't really high. 25% over what you sell? That's
        including books that are returned and books you didn't ship. It should be
        lower, but “scary high” doesn't really describe it, I don't think.

        I am assuming all publishers pay royalties based on how they sold the book
        – they're paying a percent of net and the net is determined by whether
        they're agency of wholesale. As you know, 5 of the Big Six are agency and
        Random House is wholesale. Those publishers which are “hybrid” (doing both)
        would, I assume, pay on the net in each case so their royalty calculation
        would include both lines in my charts.

        I did not investigate the commissions question. I assumed that publishers do
        NOT pay royalties on the commission, but they pay royalties on their real
        net. If any publisher is generous enough to be doing otherwise, I hope
        they'll speak up in this comment string.

        Mike

      • model agency Zürich

        I think that is the great information.  I want to think about this philosophically  but this post is about establishing a
        framework of understanding about what the real economic view of model agency.

  • http://librosenlanube.blogspot.com Julieta Lionetti

    And is still valid to consider “obsolescence inventory” when there's no longer inventory in the world of ebooks? Aren't we trying to fit a cube inside a sphere?

    • /blog Mike Shatzkin

      The inventory obsolescence calculation refers only to the print books, not
      the ebooks.

      Mike

  • http://twitter.com/V_Motter Vickie Motter

    With all the controversy, it's nice to see the issue laid out in numbers. Very interesting information.

    • /blog Mike Shatzkin

      Thanks, Vickie. I thought this kind of clear exposition of the numbers would
      help us have a more intelligent conversation.

      Mike

  • Lisa

    In the contracts I've seen (for fiction), the hardcover print royalty rate of 15% kicks in only after you've sold more than 10,000 copies, with the rate starting at 10% and rising gradually as you reach specific sales levels. If you aren't a bestselling author, most of your sales will be at lower royalty rates than your chart suggests, lowering the author % of margin.

    • /blog Mike Shatzkin

      You're right, Lisa. But, remember, if you don't earn out the royalty, it is
      all “notional” and, frankly, at low sales, the numbers don't matter much.
      These calculations really make a difference for authors that sell in bigger
      numbers.

      Mike

  • http://twitter.com/nimblebooks Nimble Books LLC

    Important post royalty math at Mike Shatzkin’s Idealog. You must take a look at his tables. The problem with his analysis is that the market is exerting inexorable downward price pressure. If you consider solely those royalty plans in his table where e-books are priced at $10 or under, authors can expect to be making between $0.80 and $2.80 per copy. The only hope that authors have for seeing hardback-like per unit royalties in the future is if the market will support as many ebook sales at $12.99 as it currently supports hardback sales at $25. That is iffy, IMHO.

    • /blog Mike Shatzkin

      Nimble, I don't disagree with you about downward price pressure. I have been
      predicting it for years (and I think my predictions have been coming true in
      this case.) More supply because of lower barriers to entry make this
      inexorable. But I don't think that reflects on my analysis. You can just
      plug in lower numbers if you think the prices will come down and you're
      doing a future-oriented calculations. These numbers are accurate for the way
      things stand today.

      Mike

  • Chris

    Maybe you should chuck King's and Konrath's ebook modelling in there just to have some fun!! :)

    • /blog Mike Shatzkin

      That gets very complicated. They get different deals in different places,
      or, at least King does. Konrath so far is only working Amazon and he gets
      70% of the selling price. He has written extensively about it.

      Mike

  • Stuart Bitting, CFO

    The approach is interesting; however, it should include all relevant costs for all formats. For instance, discounts off retail are typically much higher than 50%. In addition, for a fair comparison all production, editorial, pre-press, development and unrecouped advance costs should be included, otherwise incorrect conlcusion will be drawn.

    • /blog Mike Shatzkin

      Can't agree with you about either, Stuart.

      First of all, I think factoring in the plant and organizational costs are a
      distraction, not a clarification. What matters (particularly to the authors,
      and this was an author- and royalty-centric examination, not one trying to
      analyze publisher profitability) is the revenue and margin on each sale.

      And I was also attempting to do the analysis for the major publishers, not
      all publishers. The 50% discount average is pretty reasonable for them. It
      is true that publishers with less leverage give more than that and should
      perhaps, for their purposes, plug different numbers into my table.

      Mike

      • Stuart Bitting, CFO

        Perhaps I was not clear enough. I was not referring to the inclusion of “organizational” costs as I classify those as “overhead” and not directly attributable to each format. I am referring to including all “direct” costs as this is key to valid profit/cost analysis and these are real costs that cannot be selectively ignored. If ignored, the analysis is flawed and meaningless. Additionally, you cannot expect the earnings percentages to be equal for the authors and publishers as the capital markets provide a higher reward for the “risk takers” in the marketplace. In these cases where the publisher advances monies to authors and invests in development, production and inventory, they are the risk takers and should earn a higher return. After all, if the work does not perform well in the market, the publisher eats all of these costs while the author keeps all of the advance monies.

      • /blog Mike Shatzkin

        I tried to include the “direct” costs that are not plant. Since this
        analysis is only meaningful for books that have earned out, the costs of
        page makeup or convent conversion would have already been (should have
        already been) amortized.

        And I take your point about equity in the division of revenues, which is a
        very reasonable one, but I'm not tackling that here. That's part of what I
        referred to as a “philosophical” question which I'll examine in a later
        post. But I would preview my thinking by saying that I don't think these
        things are determined by what's “right” or what's “reasonable”; I think
        they're determined by the realities of the marketplace.

        Mike

  • Vincent

    Hi Mike,

    I stumbled across this article and find your analysis interesting. I really don't know much about the publishing industry. So here is my dumb question – do you see publishers remain relevant to the business model for the years to come? What would be their value-add in the era of highly accessible electronic publishing, distribution and marketing services/tools?

    • /blog Mike Shatzkin

      Vincent, two short answers. Marketing. And management of a detail-rich
      content-assembly and distribution process. But how much the animal that does
      that ten years from now looks like today's publisher is a very open
      question.

      And it isn't a dumb question at all. It's an existential question that the
      smartest people in the industry are considering all the time.

      Mike

      • Vincent

        Thanks Mike. And I have also found your longer answer to my question on your website. This site is very interesting indeed.

  • Sue Perkins

    After reading the above article I do wonder why I would want to submit to the publishers you have spoken to. I have had several fiction ebooks printed since 2007. Royalties range between 35% and 40% of the retail cost of the book. This is quite normal in the ebook world. While the larger publishers are discussing what they should pay, the smaller ebook publishers have been there done that and worked out what the market will support and what is fair to both author and publisher. Ebooks have been around for many years and I doubt if the larger publishers will change how things go in the ebook world.

    • /blog Mike Shatzkin

      Sue, with all due respect, although the “ebook world” you talk about has
      existed in the way you suggest for some time (Ellora's Cave, for example,
      started publishing ebooks on the basis you describe in about 2000), the
      total sales of those books are dwarfed by the sales of the ebooks by the Big
      Six, starting with a million units for the three Stieg Larsson books.

      There are other differences with some of those publishers. On the one hand,
      they might sell more direct (not giving up discount.) On the other hand,
      they are likely to give away higher discounts to get their sales (because
      they don't have the same negotiating muscle with the channels.) And almost
      all the authors contemplated in the charts I showed were paid an advance,
      most of them an advance of some substance. And most of them will sell far
      more in print than they do in ebooks, at least for a few more years.

      I recognize the disparities and I'd agree that what I wrote applies
      primarily to the large publishers, but you can plug in other numbers to the
      table for any other situation and get what I think is a meaningful analysis.

      Mike
      ——————–
      Mike Shatzkin
      /blog
      [email protected], 212-758-5670
      Founder & CEO
      The Idea Logical Company, Inc.,
      Co-founder: Filedby, Inc. http://filedby.com
      Conference Chair: Digital Book World http://digitalbookworld.com

      • http://twitter.com/ASterling ASterling

        You know, it's 70/30 right now direct on Amazon, including for “small publishers.” Not saying you can do 1 million downloads (paid for?) for Stieg Larsson's books under that present circumstance, but Stieg is deceased, is he not? I mean, that is quite a fortunate property in this instance.

      • /blog Mike Shatzkin

        All true, but a) Larsson's downloads weren't all Kindle and b) his
        reputation was made by the print book publication.

        Mike

      • Sue Perkins

        I accept your comments, but beg to differ regarding the total sales. I know ebook authors who live off their royalties and to do this they must be making a profit. I agree there are no advances from ebook publishers, but I think most ebook authors prefer this as it means they are not in debt if the book doesn't sell well.
        One thing that the big publishers will have to look at to prevent loss of sales is ebook piracy. It doesn't matter whether you're print or ebook, the pirates sell your book on line from the day the book is released.

      • /blog Mike Shatzkin

        I can imagine that some ebook authors live off their sales, particularly if
        they write many titles a year (which some of them do.)

        And the big publishers are with you on the threat of piracy (even if I'm
        not!) and several of them devote a lot of resources to fighting it. There
        was some cackling on an email list I'm on recently because the job of
        fighting piracy at one publisher is considered a much bigger job than the
        job of community manager. I would tend to agree that managing community has
        much more promise to improve publishers' commercial performance than
        fighting piracy does. And it gets far less attention.

        Mike

      • Mymia731

        As for the ebook authors who live off their royalties, it is still a game of backlist, backlist, backlist. For a good idea of how it works you could read Marie Harte's blog on it at http://marieharte.blogspot.com/2010/05/just-how

        Marie is a prolific ebook author and her gross income from sales last year is not something I could live on.

      • /blog Mike Shatzkin

        Unfortunately, in e or in print, backlist is increasingly challenged because
        there is so much new stuff coming out all the time.

        Mike

  • Chris

    Mike,

    I seem to be missing something fundamental here (my wife tells me this all the time). For print editions, the price distinction between hardcover, trade paperback, and mass-market is of course logical, but why would the eBook retail price not be consistent across all three format grids– as you've done on the cost side?

    • /blog Mike Shatzkin

      Chris, the price publishers set when they're selling wholesale is almost
      always the same price as the printed book. They don't expect retailers to
      sell at that price. And with the 50% discount, nobody ever much did. Selling
      wholesale allows the retailer to sell at any price they want and many sell
      well below their cost (these are the famous $9.99 ebooks selling against
      hardcovers at Amazon.)

      Under agency, the price the publisher sets is the price to the consumer. So
      they set a more reasonable price (but higher than $9.99 when the hardcover
      is out.)

      The prices we show are what the publisher *calls *the retail price. In the
      case of agency, it is what the consumer actually pays. In the case of
      wholesale, it is generally just the basis for determining what the retailer
      will pay.

      And the publisher generally adjusts the ebook retail price, whether for
      wholesale or agency, according to what is available in the marketplace for
      print.

      Does that clear things up?

      Mike

  • Tod Shuttleworth

    Mike –

    Good stuff. We have looked at this quite deeply. As you know, an eBook must assume part of the overhead of creating a successful book, i.e. cover design, editorial, acquiistion costs, marketing, mgmt, etc. This is especially true as eBooks becoming a more important mix of the total sales. I am surprised how some authors and agents believe that the vast majority of costs in making a trade book is printing and shipping. Yes, that is a cost, but as you point out it is not the majority of the costs. Wish we had a magic wand, but it still takes a good bit of just direct expense to go from MSS to a file ready to go to any format.

    • /blog Mike Shatzkin

      I don't doubt what you say is true, Tod. But I don't think it is relevant
      for this particular conversation. The presumption here is that we are
      looking at royalties *post earnout*. At that point, all the various plant
      costs — cover design, the 21st century version of typesetting and page
      layout, and ebook conversion costs, have already been amortized.

      In fact, that's where the hardcover royalty convention of 10, 12.5, 15 came
      from. The lower steps enabled the publisher to recover their initial
      production (not manufacturing) costs. What we're hearing about ebook
      royalties is that they are also “stepped” — that 40% we've heard about is
      presumably reached over time. That would allow recovery of some conversion
      costs.

      I personally see conversion costs as a red herring. They shouldn't exist as
      any substantial incremental cost if a book is being made with an XML
      workflow. Of course, they do exist for books made 10 years ago. But, going
      forward, except in those cases (which are rare now but will become more
      common with time) where there is no print book delivered, the incremental
      cost of delivering the ebook when you've already got a print book should be
      relatively minor. Obviously, any publisher that thinks otherwise can adjust
      the numbers to suit. The basic metrics and the structure of analysis should
      work.

      Mike

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  • Lisa Buchan (Sparkabook)

    Hi Mike great analysis. I wonder how the economic effect of lower prices will affect total earnings for authors and publishers. For example if one publisher allows lower prices for ebooks ($3 or so) what impact on demand, units sold and therefore income would this result in?

    If the answer is a lot more income then there is strong incentive for publishers to break ranks. Or do you think there is another scenario outcome?

    • /blog Mike Shatzkin

      I think we're going to see what you suggest here, Lisa. Unfortunately, this
      will be a Tragedy of the Commons. Like ebook giveaways are. Cutting prices
      (even to zero) can serve a narrow interest but it cheapens things for
      everybody. Permanently.

      Mike

  • http://www.davidderrico.com/blog David Derrico

    One thing I have to point out is you can vastly change the numbers by changing the wholesale prices you start with. And you're using an $8 agency model price for MMP books, which seems unreasonable. Customers would be paying more (since retailers can't discount), and publishers would be receiving more, for e-books than paperbacks. That kind of pricing is why customers are angry at large publishers, and it's slowing down the adoption of e-books (I'll let the reader make up their own mind if that's intentional on the part of legacy print publishers).

    I just think you're basing your conclusion (higher royalty rates on MMP) on an unreasonable pricing model that customers won't support (charging more for e-books than paperbacks).

    • /blog Mike Shatzkin

      David, I am basing my calculations on what I believe to be the case at the
      moment. I am not advocating anything; I'm simply trying to capture a
      snapshot of today's reality.

      As for the pricing and how you feel about it: most of the legacy publishing
      business cheers if you say “I'm not reading these bloody ebooks if you're
      going to make so much money on them; I'll stick with print!” And they cheer
      if you say, “The hell with these ebooks; I can't lend them or give them to
      my mother! I'm sticking with paper!” Because there are a LOT of us who just
      like the convenience of reading on devices, buy the books we like as long as
      the price isn't jarring, and don't even actually know at the time we buy the
      book we want what it would cost in another format! In fact, I think I've
      just described most of us.

      There certainly are many people who think the prices are too high and that
      ebooks as they are currently distributed are just too restrictive. Some of
      them are helping to keep bookstores and big publishers alive. Somehow, I
      don't think that upsets them.

      There are lots and lots of ebooks available at much lower prices. Over time,
      curation mechanisms will develop to help you find the ones of them (aside
      from the classics, which are cheap and already “branded”) are worth reading.
      And, over time, the shelf space available to sell print will recede like
      glaciers in global warming. As those things happen, the price pressure you
      want to see will arise. But not in the next six months, probably not in the
      next year or two.

      Mike

      • http://www.davidderrico.com/blog David Derrico

        Mike, thanks for taking the time to reply. I actually wasn't trying to get into the whole e-book pricing brouhaha or state a preference one way or the other. But I found it interesting that the numbers you used as an average example are 50% of the list price on hardcovers, 67% on TPB, and 100% on MMP. In your MMP example, you say publishers think authors should be happy getting roughly the same percentage of total margin as with print. But the list price is somewhat meaningless here. You're comparing what an author gets on an $8 MMP that actually sells for only $5 or so after discounting, vs. them earning only the same percentage on an e-book that sells for $8 – no discounting allowed, and it makes it look like the author is getting almost double the royalty, but I doubt that will be the case, long-term.

        Looking at it more closely, though, I can see the argument that it doesn't matter too much what the list price is, since it won't affect the author's percentage of total margin that much. (If we agree that % of total margin is the important figure, as opposed to % of sales price, for example.)

        I think the more important point is that publishers earn most of the profits from a book by taking financial risks in publishing them, and those financial risks will become much smaller in the e-book world. And smaller (or self-) publishers can make e-book files as well as large publishers (there aren't the same economies of scale as in the print world) and publishers won't be in a position to demand as high a cut for their services. So it doesn't seem the publisher is entitled to an equal share of the profits if their risk is much lower and they're not as irreplaceable. Also, I know print costs aren't as high as some think, but I'd be surprised if printing, shipping, and returns costs were just 50 cents higher on paperbacks than e-books.

        Anyway, good article, and interesting food for thought.

      • /blog Mike Shatzkin

        It is true that my 50 cents number for ebook cost-per-unit may be high and
        that would skew the comparison with paperback printing prices much more than
        with hardcover.

        Not only is the risk lower for ebooks than for print books, the amount of
        capital investment required is dramatically lower because inventory doesn't
        need to be financed.

        I completely agree that the majors are going to have upstarts challenging
        them in ways that would be impossible in the capital-intensive print world.
        And that the net effect will be to drive down consumer prices and,
        ultimately, the publisher's and author's take.

        Mike

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  • http://johnaustinblog.blogspot.com Gator1965

    Hi, Mike…I always enjoy your thought-provoking posts! This is a good one. A lot of thought went into your math tables. I do have a couple of observations, however:

    1- From your 4th conclusion: “Our margin calculations are strictly cost-of-sale based and include no calculations for overhead.”

    Per most acceptable business practices, your cost-of-sale should already include overhead & contingencies.

    2- Your first two columns in each table, “retail” and “net”, shows a whooping 50% reduction…without any quantitative explanation as to what happens to half the asking price or more specifically, how it was calculated.

    You say that: “The retail price is the one the publisher establishes; the net is what they get from the channel partner for each unit sold.” What the publisher establishes is ok (but should be based on all costs incurred). The number tables and analyses gets disconnected when the “net” column is not explained or cannot be calculated from other numbers in other columns..I believe this takes away from the credibility of all subsequent numbers/calculations.

    “;the net is what 'they'(?) get from the channel partner(?) for each unit sold.” I assume a “channel partner” is the bookseller and or distributor and “they” is the publisher?

    Can you please clarify?

    Thanks for your fine post…

    • /blog Mike Shatzkin

      Thanks for your questions.

      What you describe as “accepted business practice” may be exactly that, but
      it is for accounting purposes. I am not interested in here in accounting. I
      am trying to get clarity on a meaningful analysis of the differences in
      impact to the author of the pricing and royalty practices in today's book
      and ebook marketplace. In my career, I have seen — time and time again –
      how publishers confuse themselves and lead themselves to bad decisions by
      thinking that the numbers accountants need to report to the government or
      shareholders actually provide sound metrics to make profitable decisions.

      The “whopping 50% reduction” is the practice. Publishers selling ebooks on
      the “wholesale model” customarily offer 50% off the list price they
      establish. That's why the books have been discounted so much, because no
      ebook retailer requires anything like that kind of margin to be profitable.
      It was a mistake to have ever done that, but an understandable one. I wrote
      a whole post on that about 15 months ago.

      Yup, the channel partner is the retailer and/or distributor. The channel
      gets half of the established price on wholesale; 30% of the established
      price (which is enforced to the end customer) on agency.

      Mike

  • Jeff Dwyer

    Hi Mike:

    I read this post with keen interest. Unfortunately, the illustration can be misleading for folks who haven't seen a typical royalty statement with the multiple discount schedules for high discount special sales at greater than normal discounts. What many authors find depressing is when they review their royalty statement and find a few hundred copies of their book sold at regular discounts between 40%-50% for which they are paid a royalty based upon the retail price of the book, but then find that several thousand copies of their book was sold at “special sales” for high discounts which causes their royalty rate calculation to be based upon net receipts. When they do the arithmetic under the high discount special sales method, in most cases, the publishers fare as well or better than they would have if they'd sold the books at regular trade discounts. With high discount special sales to big box retailers, the publishers do very well and the talent's loss subsidizes both the publisher and the retailer. With the growth of ebook sales and the transparency of its pricing, its easy to foresee the established talent moving away from legacy publishers who want to collect a substantial premium in exchange for shrinking royalty advances, minimal editing, followed by lackluster marketing and poor promotion for all but the bestselling authors.

    • Reggie

      I agree with Jeff.

      It's only a matter of time before the talent, both bestsellers and midlisters, realize that with ebooks it isn't just about the advance or the first year royalties. It's also about the long term sales and the backlist goldmine that will be available to the talent as their career builds. Unless the publishers and agents can provide some substantial benefit for the ongoing sales the talent might begin to see them as launchers. And most spaceships leave the launch pad on the planet. They don't expend the fuel to drag it along.

      • /blog Mike Shatzkin

        Reggie, keeping backlist alive requires some administration and attention
        under any set of circumstances. I'm not saying an author can't do it; I'm
        just saying somebody has to!

        Mike

    • /blog Mike Shatzkin

      Two separate issues here.

      Special sales are, in my opinion, a bit of a pan-industry scandal. If I were
      Barnes & Noble or Borders, I would have flipped out about this a long time
      ago. Publishers routinely give higher discounts to merchants outside the
      book trade who buy only a fraction of the list. Often the eyewash that
      covers that is “no returns”, which works in these channels because many of
      these merchants don't do returns routinely (as bookstores do.) And you're
      right that the author takes a hit on these sales. In principle, I don't
      actually mind THAT. Special sales can cost more to get (they aren't
      “routine”, like all bookstore sales should be.) And some publishers do
      special sales much better than others; it isn't unreasonable to ask for more
      margin on them (quite aside from the evolving competitive issues brought on
      by digital change.)

      But high-discount, reduced-royalty sales for trade accounts are a different
      matter. First of all, they tend to occur less often with the big trade
      publishers than with smaller ones because the big ones have the leverage to
      control discounts with the powerful trade accounts. In addition, agents
      frequently negotiate mitigation of those clauses in various ways. One I have
      seen is to cap the percentage of sales that can be accounted in this way.

      The point that these reductions exist is well taken. But it actually tends
      to make the ebook comparison look less onerous, not more. These
      high-discount sales are all taking place in print, reducing print royalties
      and, if included on our chart, would make the print to ebook royalty
      comparison less favorable to print.

      Mike

  • http://twitter.com/ftapon Francis Tapon

    Thanks for the good analysis, but you left out one important row in the table, the scenario that many authors are now contemplating: breaking away from agents/publishers.

    Authors can make 70-80% royalties if they do it themselves. Moreover, they don't have the 50 cent eBook cost since the DRM is taken care of by the Scribds and Amazons of the world. They handle distributions.

    DIY authors have the design costs, but you're amortizing that away for everyone.

    It's a mistake to analyze this issue without considering the DIY model. Agents and publishers are useless without authors. Meanwhile, the disruptive effect of Smashwords and others allows authors to bypass agents and publishers.

    You're right that publishers offer marketing, but:

    1) A-List authors don't need much help there – does Seth Godin or Stephen King need any help? Nope.

    2) Unknown authors won't get any help there from publishers. So why share money with them?

    Only midlist authors might remain loyal to publishers/agents.

    Please run the numbers again with a 75% royalty for DIY authors and see the results. Thank you!

    Francis Tapon

    • /blog Mike Shatzkin

      I completely agree with you and that will be one of my next posts. I was in
      conversation yesterday with Mark Coker of Smashwords to get further
      information about it.

      I was focused on the print to ebook royalty comparison in this post. I
      ignored the comparison to do-it-yourself in this one because too many
      variables just make things too hard to explain clearly. But it is coming.

      And I believe you're right about the 50 cents not being a publisher cost. Of
      course, it doesn't change much if you take it out.

      Mike

      • http://twitter.com/ftapon Francis Tapon

        The 50 cents I was referring to was the digital per book cost for the DIY author – he doesn't have any of that cost because the Scribds and Amazons handle that (the DRM, hosting fees, fulfillment, etc).

        The publishes DOES have a per book cost. That digital COG (cost of goods) is probably less than 50 cents, but it ain't zero, like it is for the DIY author.

        That was my point on that issue. I'll read your latest post now – thanks for addressing the issue.

      • /blog Mike Shatzkin

        And thank you for contributing your knowledge to make it clearer.

        Mike

      • Kassia Krozser

        The digital COGS number of fifty cents may be high on a per book basis, but it's near-impossible to impute a number at this juncture. While retailers certainly do bear a portion of the cost, publishers continue to pay costs related to digital warehousing (servers, server maintenance, security, and more). Likewise there are freight-type charges in the form of data lines to transmit the books to retailers. This is generally a one-time cost (unless the publisher is also selling direct to the consumer), and, good news!, there are no return freight costs.

        Yes, these costs are far lower than their physical counterparts, but they do need to be factored into the equation…and, no, they shouldn't be factored into the royalty calculation. As Mike notes, removing this amount won't change the numbers much.

      • /blog Mike Shatzkin

        Thanks, Kassia, for contributing to our knowledge about what the true COGS

        is for ebooks. I always knew it wasn't zero (the only zero cost of ebook

        distribution is when you pass along a DRM-free file to a friend as an email

        attachment) but we all know it isn't much.

        Mike

  • Andy Ross

    Mike, really interesting analysis and good job. Couple of questions and observations.

    I'm assuming that the purpose of the exercise is to explain the relative “fairness” of author royalties by viewing it as a percentage of net revenue to the publisher. That is why you aren't considering additional costs not associated with overhead such as placement allowances, publisher shipping costs, et. al. Fair enough.

    1) It would seem reasonable for publishers to do with e-books what they do with paper-base books which is reduce the royalty rate after a year. But to be fair to authors, they should also increase the royalty rate before that. This is more consistent with current practice and probably fairer for most authors.

    2)Are there any major publishers who are actually giving 40% of net to authors? Is this realistic? Why include it?

    • /blog Mike Shatzkin

      Andy, my reading of the Binky Urban statement about a month ago when the
      Andrew Wylie brouhaha first arose and then the announcement last week of the
      Random House-Wylie settlement would make me think that sliding scales have
      been introduced for ebooks and that the 40% number has been negotiated in at
      least some cases.

      And since publishers tend to pitch their ebook prices to relate to the
      cheapest print edition in the market, the “reduction” you talk about in
      print is replicated in ebooks.

      Mike

    • Storyscribe

      Yes. there are. I write for four epublishers and my royalties are between 37% and 40% of net.

      • /blog Mike Shatzkin

        Storyscribe, I'm not sure you answered Andy's question. He asked whether

        there are any *major* publishers giving 40% and you answered that you're

        published by four *e*publishers and getting 40%. You two aren't talking

        about the same pool of publishers.

        I think the answer to Andy's question is “yes” for backlist where rights are

        ambiguous but, so far, “no” for new titles most of the time, although Binky

        Urban of ICM was quoted as saying she has negotiated deals with majors at 40

        and even 50 percent!

        Mike

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  • Jcpcd2

    Ebooks won't be “out of print” unless withdrawn so no potentially costly decision as to or not to re-print so initial costs are spread over such time as to render them very unimportant. Strangely this is never brought up esp. by publishers.

    • /blog Mike Shatzkin

      It isn't the *time* over which costs are spread that matters so much as the
      *sales*. Some books just don't sell and that's a risk publishers are taking
      with many of their investments that aren't in books by established authors.
      (And even sometimes those that are…)

      Mike

  • Mario Rui

    I am brasilian and my english is bad. Sorry

    At the digital era, at least the greats writers, will not need publisher.

    this is the afraid of publisher.

    • /blog Mike Shatzkin

      Your meaning comes through, Mario.

      And you're right.

      Mike

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  • Julie A. Fast

    Hello, great post. I am the author of three bestselling books in the mental health field. I started selling eBooks off my website in 2002, so I was way ahead of the curve in terms of publishing. For my last book with Penguin, my agent and I made it very clear that we did not want them to have eBook rights and that we would negotiate any such rights separately.

    Imagine my surprise when I see my book on Kindle!! For a lower price! At the same royalty! So, I did what all naive people do, I wrote my editor who passed me on to accounting. I explained my story and said- I am very experienced in eBooks and made it clear I wanted to renegotiate my royalties. The person said, “We don't have a separate policy for these products.” I said, “Products? Don't you mean electronic books? ” She said, “No, we don't consider them electronic products. If you look at your contract, you will see a clause that says we have all rights to your book including 'display rights' and as the Kindle is a display reader, we have rights to put the book on Kindle. ”

    We had an email argument. I finally got her to admit it was a damn eBook- but by then, I realized I was screwed once again by the publishing world, so I backed off. This was over two years ago. Now we can renegotiate our royalties for our eBooks. She has probably lost her job anyway as Penguin was not exactly in the forefront of taking care of its authors.

    Can you sense my anger! My solution, after seven years with major companies, I will not longer send them my books. I started my own publishing company. The numbers above explain why. Thanks to Mike for alerting all authors that we have to take care of ourselves in ALL areas of the publishing world. I still love writing and I still love books in any form, but I also love making my own money. Julie Fast

    • /blog Mike Shatzkin

      Julie, I wouldn't be so fast to single out Penguin as insensitive to

      authors. I think you might have encountered a similar situation with any big

      company.

      It seems odd to me that the Kindle version would be heavily discounted.

      Penguin is an “agency” publisher, so they should have set a price and Amazon

      should be honoring it.

      Nonetheless, authors who can build their own audiences (as I'm sure you

      have) aren't locked in to publishers. They have alternatives. This is a fact

      publishers will be coming to grips with in the months to come.

      Mike

  • http://www.antiquesrepublic.com/ Alonsarita03

    ciao!,
    With the growth of ebook sales and the transparency of its pricing, its easy to foresee the established talent moving away from legacy publishers who want to collect a substantial premium in exchange for shrinking royalty advances, minimal editing, followed by lackluster marketing and poor promotion for all but the bestselling authors.

    • /blog Mike Shatzkin

      There is a lot of evidence that established authors are taking that option

      very seriously.

      Mike

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