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.