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 |
|---|---|---|---|---|---|---|---|
| $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 |
|---|---|---|---|---|---|---|---|
| $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 |
|---|---|---|---|---|---|---|---|
| $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.