The Authors Guild’s Mary Rasenberger Gets It Wrong on Flat Royalties

In July’s IBPA Independent, Authors Guild executive director Mary Rasenberger wrote about the potential future of a flat royalty rate for authors. Unfortunately, her article included inaccuracies that almost certainly will mislead most authors.

In her article, Rasenberger makes one key statement that is so grossly inaccurate that I feel it calls into question her knowledge of everyday industry practices of the publishing business.

The standard e-book royalty rate for many publisher is 25% of net profits; the publisher shares just a quarter of his profits with publishers.

As an agent, I have negotiated publishing contracts with every major house. No publisher shares a percentage of net profits. According to Merriam-Webster, a “profit” is “the excess of the selling price of goods over their cost.” It is not the difference between what publishers are paid and what they pay authors.

What publishers’ contracts actually say is that the publisher will pay the author “25% of the net amount received.” This language is nearly universal in publishers’ contracts. Contracts also nearly always define the term “net amount received.” For example:

All monies actually received by the Publisher from sales by the Publisher (directly or through agents or distributors) of Electronic Version(s), less any applicable taxes, handling or processing fees paid by the Publisher, customer refunds resulting from bona fide errors in the transmission of the Work and commissions paid or payable to third parties.

So, how does this work in practice? If a publisher has an Agency Model agreement with Amazon, it generally will receive 70% of the amount paid by the consumer, less a delivery fee. That delivery fee may be only seven cents, but they add up. On a $9.99 eBook, the publisher may receive $6.93. It will then account 25% of that net amount received to the author, or $1.73. The $6.93 is not the publisher’s profit on the eBook. It may be difficult to calculate the profit on an individual eBook sale because the publisher’s expenses are amortized across the costs of publishing the book in multiple formats. The 25% the author received is a royalty expense. The costs of paying editors, copy editors, typesetters, proofreaders, cover artists, cover designers, interior designers, publicity, eBook conversion expenses, distribution fees, co-op payments, and other expenses all come out of the cumulative amounts received before you can figure out profit. One could easily argue that authors benefit from getting a share of the amount received per book, because so many books are not profitable.

If a publisher has a wholesale-model relationship with Amazon, Amazon is likely paying that publisher 45% of the publisher’s suggested retail price on the eBook, i.e., Amazon is receiving a 55% discount. So, if the publisher has an SRP of $9.99, Amazon is likely paying it $4.50 for every eBook it sells. Amazon may also be discounting the book well below the publisher’s SRP. Of that $4.50, the author would receive 25% or $1.12, though if the contract includes a deep-discount clause that can be applied to eBooks, the author could be receiving just 10% of net, or 45 cents. Regardless, in either scenario, the author receives more money if the publisher has an Agency Model with Amazon.

Is this making a mountain out of a molehill? No, because the difference between a percentage of profits and a percentage of net is as big a deal as a percentage of retail price versus a percentage of net. There is no doubting that deep-discount clauses are prone to abuse. The fix for that is for agents to argue that they cannot apply to “normal wholesale and retail channels, including but not limited to sellers such as Amazon.com, Barnes & Noble, Costco, Walmart, Target, and other retailers customarily engaged in the sale of books.” Some publishers will agree to this and some will not. Like anything else is a publishing contract, the publisher’s willingness to negotiate depends on how badly it wants the book or author.

Anyone who has ever heard the term “Hollywood accounting” should be very afraid of the idea of publishers paying authors based on profits. As for the argument of whether or not authors would be better receiving a percentage of the SRP (as they do on hardcovers and paperbacks) versus a percentage of net on eBooks, that’s highly dependent on the discount. If publishers can maintain an Agency Model with sellers, then the net is actually better and, in fact, would be better across the board. But when discounts get higher and net gets lower, the royalty based on SRP is better.

Therefore, the argument could be made that a flat royalty might work and might make sense, but only if the discounts granted are low enough to ensure authors don’t lose money on the deal. And there are too many moving parts in that. Publishers would have to draw lines in the sand regarding their discounts and booksellers would have to stop demanding better discounts. However, the history of publishing shows the opposite trends. So an across-the-board flat royalty not only would not benefit authors and provide higher income, it would no doubt hurt them.

Do I think publishers could pay more in eBook royalties? Yes, but I am less concerned about the rate being based on net or retail than I am about the lack of escalators. As the number of copies of a book sold increases, the costs of publishing it are amortized over more and more copies. Therefore, the profit per copy increases. Yet, eBook royalties rarely have escalators. Think about that. The eBook edition is the one likely to be available the longest and, over time, probably sell the most copies. It is, by nature of the format, less expensive on a per-copy basis than printed copies. Yet, the author’s royalty rate does not increase based on the number of copies sold. This is the battle the Authors Guild and other writers’ organizations should be fighting: the fight to get escalators on eBook sales.

When you factor in all of the above, flat royalties are not worth considering. They may simplify the accounting, but they work against the very goal the Authors Guild would seem to be seeking in its argument for authors to receive a larger percentage of “net profits.”

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