Do The Math

So what do e-books mean for John Taylor and his bride, Suzie?

Penguin is selling an e-book of The Bride Wore Black Leather for $12.99, and the hardcover cover price is $25.95. These prices are not unusual.

The typical royalty rate from a major publisher on an e-book is 25% of net receipts, and the typical publisher share of the e-book price is 70%. So 70% of $12.99 means around $9 going to the publisher, and around $2.25 going to the author.

The typical author royalty rate for a hardcover with a big publisher is between 10 and 15%, we take the middle tier on that at 12.5%, and the author gets around $3.25.

Hence, every time somebody trades from buying a hardcover of Bride Wore Black Leather to buying an e-book, the income to Simon Green drops from $3.25 to $2.25.

This isn't good news, if you are Simon Green!

HOWEVER...

For A Hard Day's Knight, now in mass market, both the e-book and the paperback are $7.99.

Let's do some more more math.

Typical royalty of 8% on the paperback, around $.64 on each paperback sale.

Same math formula for the e-book, list price x .7 to the publisher x .25 to the author. That's $1.40.

Every time an e-book is sold instead of a mass market, the author gains $.75.

I'm using the Nightside books as the example here, but the math would be similar for pretty much any set of hardback and paperback books coming from every major publisher. For a very successful author, the hardcover math is much worse, you're probably trading down from a 15% royalty and a higher hardcover cover price, and losing closer to $2 every time out. And gaining less on mass market sales, where many top bestselling authors might get a higher royalty rate. For a less successful author, the hardcover royalty might be only 10%, and the loss on the e-book trade is reduced. But maybe you're getting only a 6% royalty on your paperback, so your gain as readers trade from e-book to paperback may be even bigger.

Interestingly enough, then, at current industry standard royalty rates, the less successful authors might be better off -- way better off, even, than the most successful authors. You can't say for sure, that's for sure, you have to start doing fancy calculations at all different kinds of permutations of trade-offs to figure out 100% for sure if a given author is better off or worse off, but the math certainly shows that an author with huge hardcover sales to be turned into e-book sales has a lot more lost royalty potential than the author who's being published only in mass market.

Hmmm.

From the publisher standpoint...

You take a $26 hardcover, the publisher may get around $12.50 in revenue back from that. Has to pay the author $3.25, and the gross revenue after royalty expense is $9.25. For the e-book the gross revenue is $12.99 x .7 x .75, or around $6.80 if the e-book is priced at $12.99, $5.25 if the e-book is priced at $9.99. The publisher's gross revenue after royalty expense is clearly way less -- way way way way less -- for the e-book.

Hmmm, we're all sitting around thinking that the publisher is getting rich off of e-books.

That said, we must keep in mind that the hardcover book has more hard cash expenses to it. The unit cost might be $2. I'm going to assume that two-thirds of the books that are printed actually end up selling. So that's $18.50 in revenue after royalty expense for two books, less maybe $6 for the actual physical manufacturing costs of three books, less a little bit more for the freight and the warehouse expenses and other hard costs of a physical book. So that ends up being maybe $6 per book. So for a $12.99 e-book, it's kind of looking like the e-book is $12.99 instead of $9.99 for a reason, the $11.99-12.99 price point is about where the publisher can make as much money per book as on the hardcover, before all the overhead and other costs associated with the book itself -- the cover artist, the copy-editor, the office rent, the salaries for the editors and everyone else hanging around the office. At $9.99, the publisher is taking a real revenue hit from people buying e-books instead of hardcovers, even after taking account of the hard cash expenses that go along with the physical book, but not the e-book.

Bottom line here, on hardcover books, the move to e-books isn't helping publishers very much, if at all.

But on mass markets, the publisher may get $3.50 on a $7.99 paperback, have a royalty expense of $.65, and hard cash expenses for the physical book of $.80 or $1. Let's again assume three books printed for every two sold, that's $7.20 in revenue for selling two books less $1.30 royalty expense less, let's say, $2.70 in hard cash costs. That's around $1.60 per book before overhead. For the e-book at $7.99, it's $7.99 x .7 x .75 = $4.20 !!!

So unless my math is wrong, publishers are doing rather nicely when people trade from mass market to e-book sales, and the author is doing a little bit better off but nowhere near as better off here as the publisher is doing.

Again, there are myriad other factors that can go into this, this is just rough sketching, the unit costs for a mass market book from a 100,000 copy first printing will be vastly less than for a mass market with a 15,000 copy first printing, and that all by itself can make this math look a lot different from book to book.

To be honest, I'm so astonished at how much the math favors the publishers on trading from mass market to e-book that I'm thinking I've got to be getting something entirely wrong, the publishers can't really be doing that well on the mass market, can they?

Now, if you are an author with a track record, the most important lesson in all of this is that you can't determine the appropriate advance for your book by looking at your royalty statement. You might be losing royalties big time on your hardcover sales, but the publisher isn't losing per-unit profit the same way you're losing royalties. You might be gaining royalties on the paperback vs e-book side, but the publisher is probably gaining even more.

So it's like the title of this post says -- Do The Math. You or your agent need to try and grope your way toward looking at the P&L (profit and loss) statement for your book, not the royalty statement. Your numbers for that will never be like the publisher's, because all the publishers have different ways of allocating overhead and other unique factors they won't share with you, but you can rough something out by looking at your previous royalty statements and looking not at royalties earned but at copies shipped vs. sold and e-book copies sold and the expenses that go along with each.

The second thing to ponder here ... what do these numbers suggest regarding the legitimacy of 25% of net proceeds as an appropriate industry standard royalty rate for e-book sales.

Hard to say. If the publisher's trading more hardcover sales for e-book, then 25% of net seems to be kind of the right rate for keeping publisher unit profit at about the same level regardless of format. But 25% of net doesn't seem right when the publisher is trading more mass market sales. The other factor here, authors can easily self publish and get the full 70% of e-book cover price for themselves. Publishers have to justify what they're doing to be keeping three e-book dollars for every one that goes to the author when the authors can easily keep all of them. Because of that, and because of the revenue potential trading from mass market to e-book, I think the 25% has to move up some. Some.

Final quick thing, let's look at a trade paperback. $15-16 paperback, $12.99 e-book. So again $6.80 in gross revenue to the publisher on the e-book, after royalties. On the print side, two books bring in $14.50 or $15 in revenue, less $4.00 for hard physical costs for three books, less $2.40 royalties. That's $4 in gross revenue. Here, it looks like there's more revenue for both the author and the publisher, more equitably split between the two than on the mass market.