Harlequin and e-royalties

There was a bit of controversy in June because Harlequin was sending out letters to "increase" their e-book royalty rates, but to levels that were in some instances less than what had become the industry standard. They've now sent out a second round response to some of the complaints that had been received, which I thought I'd comment upon.

The Harlequin offer is that they will pay the current industry standard of 25% of net receipts for books in their "single title" program. These are books that come out under Mira or Luna or other imprints that are under the branding of an imprint just like a Del Rey book from Random House or an Obsidian book from Penguin, but not under a broad 4-in-a-month numbered series umbrella like Harlequin Nocturne or Harlequin American. For in-series books, their offer is a scaled royalty of 15-20% of net receipts with escalations based on total digital revenue for the books. They explain this lower royalty by saying, essentially, that they are special. That their series are so heavily branded, and sales so dependent on the readership that buys their Harlequins every single month in their series of choice, that the author just isn't as important to the success of things.

If I had a stable of romance authors, I might say... Just in general, there are other publishers that have distinct marketplace impressions. Baen, Daw, Ace military SF, a Berkley Prime Crime book, these are some examples of publishers that have really strong identities in the marketplace. And even within a series there are books that will sell better or worse because of the identity of the author or quality of the manuscript. What if a book is first published as a series, the author takes off, Harlequin repackages outside the series to give the author a longer ongoing life resting more on the author name than series name? There are a gazillion other things that could be said about their offer, the letter explaining it.

But what fascinated me most is this part of the FAQ:

Q: When an older contract provides that the digital royalty is 50% of NAR [Net Receipts], how does that work in practice?
A: Our authors contract with Harlequin Books SA (“HBSA”), our related Swiss company. HBSA licenses the right to publish an author’s work in print and digital to our operating companies and to third party publishers, which then bring books to market in their country (incurring costs of translation, production, distribution, marketing, branding, etc.). In return, HBSA receives a license fee. The NAR is the license fee. For editions where the author is to be paid 50% of NAR, the author’s royalty is therefore 50% of the license fee received by HBSA. The license fees are expressed as a percentage of cover price. Historically they ranged from 6% to 8%. The author’s 50% share of that fee would then equal 3% to 4% of the cover price.

This is where Harlequin explains why it is better to get 15% or 25% of something, where you might otherwise think you are entitled to 50% of that exact same something.

Which -- guess what -- isn't entirely correct.

There are a lot of Harlequin contracts from the early 2000s that, per this FAQ, treat an e-book as a subsidiary right that Harlequin clearly has, but more as a right to be licensed to someone else instead of sold directly by Harlequin. Thus, instead of having a royalty rate, they lump those in with rights like book club or large print or audio that are most often, when given to a publisher, split 50/50 with the author. This is a general situation that pops up in publishing more often than you might think, when a publisher develops the capability to exploit a right that once required a third party.

The right to sub-license within Harlequin isn't as blanket a right or ability as the FAQ would suggest. Sometimes there will be language in a contract that says that licensing within the family has to be done on an arms-length basis, or on terms reflective of what one might get from licensing to a third party (loophole alert: who gets to decide what terms are reflective?), and even without the specific language there is a body of law on fiduciary duty that says you can't be too egregious in doing things that undercut the position of somebody who's entitled to a share of your income.

So let's look at how I as agent might discuss this FAQ, and what alternate answers might be given:

1. If you license your book to Rosetta Books, or to Open Road, or to eReads, you are going to get something like 50% of that third party e-book publisher's net receipts. If you go to Amazon's KDP platform, you might get 50% or 70% of the e-book list price that you establish less small deductions for delivery fees or the like.

2. If you're in the single title program, Harlequin is offering an industry standard royalty rate. You have a problem with that? And 25% is half of the 50% if Harlequin did all its e-books via Open Road, Rosetta, etc. There are many restrictions on using KDP and the similar e-book platforms, no major publishers are using those.

3. If you are in a Harlequin series, where they want to offer you a starting royalty rate of 15% of net receipts instead of the currently more customary 25%, things get a little more interesting but still to only a limited extent. The idea that you sign for 15% of net because it's better than the 3-4% of cover we'd have to pay under that 2002 contract doesn't look so good, but I'm sorry to say the argument isn't entirely that easy for the author or agent to make. As an example, if Harlequin did a broad license with an Open Road, can they say that some percentage of the customary e-book royalty was going to be allocated to granting Open Road the right to use Harlequin's series trademarks and branding, and that this was worth a fraction of the royalty? Probably, it might depend in part on just how much use or co-branding there was, but yes, there are probably ways to do this. Suddenly 50% of net receipts becomes 33% or 40% or 45% of net receipts that are actually allocated to the underlying rights to the book, the rest allocated toward use of the valuable branding or trademarks, and getting one-half of that would look very much like the offer Harlequin is making.

4. The biggest pitfall for Harlequin that I can see is on the question of whether it's a bona fide sublicense if Harlequin publishes a Harlequin e-book. The argument that can be made here is that Harlequin pays a full cover royalty in North American when their editors in NYC sign up a book for a contract that you negotiate with their Ontario-based contracts person, and that even if the contract is with Harlequin S.A. they don't claim that Harlequin S.A. is publishing the book under license to Harlequin in North America. If they don't make that claim for the mass market, how can they make it for the e-book? If that argument were successfully made, Harlequin might not be able to publish the e-book without having a specific royalty rate amended into these older contracts. Since that would be more of a Mexican stand-off, maybe Harlequin would sweeten their offer for the series titles.

5. But even then, there are alternative approaches Harlequin could take. As an example, the precedent is very much that not every Harlequin imprint around the globe does every book that Harlequin does in North America, so if they had e-books done through an Australian or British subsidiary that has a track record of exercising selectivity, and if the web sites that sell those e-books don't have tight territorial controls over where they sell...

In the course of publishing events, authors have made point #4s, and publishers have found point #5s. As an example, in the late 1990s (if memory serves) Harper settled an action over how much money Harper US received selling books to Harper Canada. If they sell the books to themselves for less, the net receipt is smaller, the author royalty is less. The authors "won" this, and Harper stopped selling books to Canada intracompany at artificially low rates. Then Harper decided to offer a lower royalty on those sales moving forward, and to be very firm on keeping to that lower royalty rate. The victory was ephemeral.

This post isn't to say that everyone rush to sign on Harlequin's dotted line, nor to say you rush to their attorney ready to make my point #4 regarding their 2002 contract. I'm admiring, in a way, because the Harlequin offer on series titles might be low, but at the same time just high enough that it's hard for the average author to say no. It's the velvet glove version of "make him an offer he can't refuse."