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A blog wherein a literary agent will sometimes discuss his business, sometimes discuss the movies he sees, the tennis he watches, or the world around him. In which he will often wish he could say more, but will be obliged by business necessity and basic politeness and simple civility to hold his tongue. Rankings are done on a scale of one to five Slithy Toads, where a 0 is a complete waste of time, a 2 is a completely innocuous way to spend your time, and a 4 is intended as a geas compelling you to make the time.

Thursday, February 4, 2010

Royal Tease

As publishers had to establish royalty rates for e-book sales over the past ten or fifteen years, two basic models emerged, at least with agented contracts: 15% of cover price (because 15% matches the highest hardcover print royalty in traditional publishing contracts), or 25% of net receipts, which is the actual money the publisher receives, and a bigger portion of net proceeds than found for any actual print edition.

In an indirect way, a client and I were discussing this week which of those royalty rates is better. Complete with very thorough spread sheets. Let us explore...

Let us assume a $10 cover price; a $13 cover price changes the numbers but not the percentages, which are more intuitive with a $10 starting point.

First we have the Kindle Classic model. A publisher says the e-book has a list price of $25, Amazon pays the publisher kind of like it's buying a hardcover at traditional retail discount, maybe $12.50, and then sells the book for $9.99. 25% of net could be $4.125, which is over 41% of the actual cover price and over 15% of the publisher's list price. That business model is crazy. After a while, no matter how many Kindles you sell at no matter how high a profit margin, you can't keep losing $2.50 on every e-book sale. But clearly, 25% of net could be a lot better than 15% of cover.

Normal examples: An e-book costs $10, the e-retailer gives the publisher one half of that, or $5, and then at 25% of net proceeds gives the author $1.25. The effective cover price royalty is 12.5%, and the 15% of cover is better for the author. But we're being told that Apple is offering 70% to the publisher, which means the publisher gets $7, and the author gets $1.75, and now 25% of net proceeds is effectively 17.5% of cover price. The net proceeds royalty is better.

And the thing that's always been in the back of my mind is the scenario where the publisher sells e-books directly to the consumer, maybe gets 90% or 95% of even almost 100% of cover price, and the effective royalty to the author is now 22.5% to 25% of cover price.

My guess is that most publishers offering 25% of net felt they were doing better than the ones offering 15% of cover, but you can see why that's not such a sure thing. Thus, I was very agnostic on which model was better for I and my clients.

So should I have been gunning for 25% of net? It sure does look higher, doesn't it.

Well, not so fast. You pay Amazon $10 for an e-book that is delivered wirelessly to your Kindle at no charge. Well, maybe not to you. What if Amazon insists that thirty cents come off the top of the $10 to pay for their delivery charge? You pay by credit card, and there's some kind of commission for that. What if Amazon insists that thirty-five cents come off the top of the $10 for that? Now, the 70% is based on $9.35, so Macmillan gets $6.55 from Amazon, and your 25% of net becomes $1.64. This is still 16.4% of cover, and that's still better than 15% of cover, but it's not very much more. Another deduction or two off the top, and we're at parity.

And let's look a little further into the future. Right now, with 40 e-book devices supposed to go on sale in 2010 and the iPad looming as a major threat on the horizon, no e-reader retailer can afford to be without huge swaths of content. But is the market really going to support 40 or even 20 devices? Not forever. We will have a shake-out, we will have a handful of devices or formats, and there will be a concentration of market share. And 30% is not such a big margin for a retailer. A printed book retailer gets the book at 40% or 50% discount, not 30%, so what happens when the survivors of the shake-out start to take advantage of their stronger market position, no different than Walmart putting the squeeze on a toothpaste maker? The 70% share being talked about by Apple and Amazon may not be 70% in five years.

So in 2020, will you be better off with a 15% cover royalty, or a 25% net? Anyone who claims to know the answer to that is lying.

5 comments:

Maria said...

If they are going to an "agency" model anyway, why not just sell directly from the publisher site? The big name authors could certainly do well in that scene. Sure some of the unknowns might not sell best there, but with electronic versions all the reasons not to become a direct seller (well, okay most of the reasons--being in competition with your resellers is always a hard thing to manage) go away.

What I'm not seeing here that I think I should be seeing is embracing of the technology. Obviously I'm immersed in ebooks on a daily basis, much more so than the average person--but I can't tell you the number of times there are posts on kindleboards and amazon forums, and mobileread forums...about "I wanted this book and it isn't in ebook." This lack of taking advantage of demand is disheartening.

If I had to guess only half (or possibly less if you take into account library and used copies) go on to buy a print copy when they can't get the book they want in ebook form.


Then take into account the fact that I can't recommend entire SERIES on these forums because the first book isn't out in ebook form (yes, John Levitt, I'm looking at Dog Days here) or the series is hit and miss (Yes, Carol O'Connell, I'm looking at you)...demand, recommendations...missed opportunities.

Tim Akers said...

So, if I'm reading this correctly, Amazon is losing money on each book sold and is counting on its margin from the kindle itself. That's stupid. It's exactly backwards.

The loss leader should be the console itself, and the profit point should be the units that follow. Give away the razor to sell the blade. This is how gaming consoles work, and that seems to be going okay. Amazon then either directly sells the books at a profit (however that needs to work) or they license the formatting of their ebook software to publishers, then collect a commission per book sold in that format.

The only way to truly shake out the 40 or so ereaders is to gain overwhelming market penetration. And the best way to do that is to give the damn things away.

The Brillig Blogger said...

Tim Akers is correct, but not entirely. Amazon is losing money on the $9.99 new release e-books it sells. It is not losing money when somebody buys a $6.29 priced e-book of a book available as a $7.99 paperback. But that's still a lot of e-books where Amazon is losing money every time out, the exact opposite of the Gillette model, and no, that has never seemed to me a very sustainable model.

author Scott Nicholson said...

Many people are confining their focus on the top-end ebooks or new hardcover bestsellers, but that is only a small fraction of the ebook market. Spend just a little time at Amazon and you'll see tremendous activity in backlist and indie author purchases, all of which Amazon presumably is making money on. That doesn't change the net/flat royalty issue, since those are percentages, but Amazon is dumb like a fox.

They have basically planted an ebook value of $9.99 in the public's mind. With their dominance of the ebook field, which I've seen claimed as anything from 50 to 90 percent of ebooks sold, losing money on one class of books was brilliant. Publishers should have been developing their own ebook stores and pursuing ideas like "Netflix-type" libraries instead of focusing primarily on protecting hardcover sales. I don't see how publishers can make up the lost ground, and what they'll really be doing for their authors to justify taking 75 percent of net proceeds or 85 percent of cover cost on ebooks.

The Brillig Blogger said...

Some good points from Scott Nicholson.

In fairness to publishers, figuring out how you transition your business from an old technology to a new one is a sticky thing for any business. I'd argue that book publishers have so far done a better job of doing it than the music industry or the newspaper industry. But Scott's entirely correct that the value added aspect of traditional publishing will be revisited in the e-book age, and publishers aren't yet close to figuring out that part.

Is Amazon dumb, or dumb like a fox? Hmmm. If we just look at that book-wise, I think we'll know in 24 months if the Kindle has leveraged its early start to thrive against heightened competition. Regardless of that, Amazon is so much more than just books these days that it might not matter if they're dumb on the e-book question, or dumb like a fox. I've ordered items as diverse as books, greeting cards, toner, and air filters from Amazon in the past year.