Reserve, Rinse, Repeat

Here is a letter which I am sending today to the CEO of one of the major publishing conglomerates.  All authors and agents should feel free to copy and paste, put in appropriate specific details, and do the same.

Once upon a time, the reserve against returns was kind of necessary.  Books only sold in print.  All those print books were fully returnable.  Sometimes 70% of the copies were returned.

But now, books sell digitally, with very few returns on ebooks and downloadable audio.  Printed books are still fully returnable, but for a great many books, sales through channels that lend themselves to especially high return rates have dwindled.  I'm not saying reserves are entirely unnecessary.  I'm saying it's time to push back on doing things this way because they've always been done this way, accepting reserves in any quantity when they no longer serve their original and intended purpose.

There are too many business practices tilting against authors, and we can't continue to accept all of them.

Dear CEO:

I hate arguing about pennies, but I also don’t understand why publishers want to keep pennies from my authors for no reason, holding reserves on titles where none is necessary.

I’m attaching the summary page of the just-received royalty statement for [book by my client] by [client name], as the quintessential example of this.

Please notice the book earned $1750 in ebook royalties.

So how can you justify the 92 copy reserve on the trade paperback?

The trade paperback royalty per US copy is $1.20.  If the ebook royalties were to drop by half on [book by my client], [you] would still have $875 to credit to the author’s royalty account on the next royalty report.  That is a sufficient reserve to cover the return of 730 trade paperback copies. The actual returns on the trade paperback were 46 copies.  

This isn’t reasonable.  It’s time for your contracts to acknowledge that, and to renounce the right to hold reserves against returns when ebook income can reasonably be expected to cover print returns, as is clearly and abundantly the case on this royalty report, and on so many others.

Hugh Howey Is Right!

So, yes, the big publishers really do treat their authors shittily sometimes.

This example can be considered an extension of my post in March called The Royalty Jar, where I discussed reserves against returns as part of a series of posts on royalty statements.

As I mentioned in that post, we (a) try to review our royalty statements very carefully, including any itemization of the reserve against returns on the royalty statements (b) have contract language that puts some sort of limit on how much money a publisher can hold back in its reserve against returns.

Late last week, I was reviewing a royalty statement from a British publisher.

The contract language we negotiated for this deal says that the publisher can, at its discretion, take a reserve on paperback editions each semi-annual period of up to 25% of the author's royalty earnings for this edition.  Simple, right!  The language even suggests that the publisher could use its discretion to take a smaller reserve.  Not that I'd ever expect it, but it's a nice thought.

So for the second half of 2013, the paperback edition of this book earned £1200, 25% of that would be £300, and the reserve against returns on the royalty statement is -- £500 !!

Here's how the publisher accomplished this trick of turning 25% of £1200 into £500.

The previous royalty period was the first for this particular edition.  The book earned £3200, and of course, the publisher in that instance did the same math as any of the rest of us and took a £800 reserve.

This period, the publisher decided to add in the refund of the prior period reserve to the actual royalty earnings for this period.  Or, to put it another way, even though the author earned £3200 last time and £3200 was used as the basis for calculating the reserve against returns last time, 25% of that £3200 is now being "earned" again.  So what is supposed to be, contractually, a 25% reserve has now become a 41.67% reserve.

The publisher's gift to itself is a gift that keeps on giving.  Because...

The publisher has now taken an extra £200 reserve that it shouldn't, and it will refund that money to the author, and the author will "earn" that money a third time, and the publisher will take an extra £50 on the next reserve against returns.

The publisher still has the correct £300 reserve which it will refund next time, so that money will be "earned" a second time, and that will increase the reserve against returns by £75.

And the time after that, there will now be:
£50 the author will "earn" a fourth time, £12.50 of which will be "earned" a fifth time.
£75 the author will "earn" a third time, £18.75 of which will be "earned" a fourth time
and the correctly held 25% reserve for the first half of 2014, which will be incorrectly "earned" a second time.

Ultimately, when you carry out the math, the £3200 that the author earned on this paperback in the first half of 2013 will become a total "earning" of £4266 when determining the reserve against returns.

Bit by bit, drip by drip, the publisher will forever keep taking more than the 25% reserve against returns which they agreed to take in the contract.

Publishers do sometimes overpay authors, and they can lose millions of dollars on this book and thousands of dollars on that book, because they overpaid.  Then again, those choices are always the publisher's.  There's nothing right or fair about playing games like this with the reserve against returns for one author in order to compensate for bad decisions you might have made for some other author.

Especially when the shift to e-book sales over print sales means the whole rationale for having any reserve against returns is considerably reduced.  There is almost always money coming in from the e-book to make up for any overpayment of royalties due to returns of the print edition.

Now we shall present the publisher with this information...

the royalty jar

Over the course of these royalty season posts, I have spoken a lot about the reserve against returns, and this entire post will deal with this.

The idea of the reserve is rooted in reality.  The books the publisher sends out can be returned for full credit by booksellers.  The publisher has to ave some protection against paying royalties on copies that might be returned.

But the reality of the reserve is that it is the publisher's cookie jar, a source of abuse, and like many things in the publishing industry a relic of a past age that doesn't want to come kicking and screaming into modernity.

Once upon a time, the fate of a book really was a mystery.  It isn't any more. With Bookscan and other direct ties between major retail accounts and major publishers, the big publishers know the fate of a book.  Maybe not by June 30 for a book that came out in May, and I can understand a bit if the reserve against returns on that first royalty report is high.  Yet, I will occasionally see publishers taking such large reserves that they pay royalties for fewer copies than Bookscan reports as sold through the end of the royalty period -- and way fewer than we know are sold by the time I am getting the royalty statement.  In those instances, on general principle, I complain to the publisher even about very small numbers of copies.  Paying my client a royalty for 2536 copies when we know the book sold 2682 -- that's not a reasonable reserve against returns.

I mentioned how DAW used to hand-write "too early to tell" for the rest report on every royalty statement.  Now, their default is to take a 100% reserve on print sales on the first royalty report, whether a book has been on sale for  six weeks or six months.  This used to matter less because the books would often not earn royalties on the very first statement even if the reserve was closer to 50% it becomes more likely that the client could get a small royalty check even from known activity on a short period of time.

25 years ago, retail distribution for books was hugely inefficient.  It could take months for information to flow from the corner drugstore to a small independent distributor to the publisher's warehouse.  Shipping fully returnable books into distribution channels that ranged from highly inefficient to somewhat inefficient with long lag time on information reporting -- you could understand why reserves had to be high in the early going.  Now, Amazon has a low return rate, and channels with higher returns like Costco and Walmart have pretty good IT and can provide Point of Sale information on copies sold to publishers very quickly.  But reserves are often still held as if average return rates are still what they were 40 years ago.

The purpose of a reserve against returns was to keep the publisher from being on the hook for paid royalties on copies subsequently returned.  But even though the typical novel is now published in multiple formats, including audio and ebook formats sold as digital downloads with few returns, reserves are held on each print edition as if the others don't exist. If you know a book is being published hard-soft, can't the reserve on the hardcover be moderated in anticipation of paperback royalties?  Many of our authors now sell over half their copies in ebook, so why take a print reserve at all when there will always be ebook royalties to make up the difference?

I don't expect publishers to do away with reserves entirely, but I sure think they should be held with a lighter touch in 2015 than in 1985.

We try in current contracts to specify that reserves not be held on digital products or after the first few royalty periods, or at least be justified upon request. But I feel like we need to get more aggressive in evaluating reserves held with a broader perspective with regard to the range of editions published.

But book by book, do you or your agent look at all your reserves against returns every period?  Do you check them against Bookscan?  Do you check the size of the reserve against actual returns? Do you peek inside the publisher's cookie jar to see if there are cookies?  In many instances, even if the reserve is reduced you may still have a negative royalty balance or be due so little money is isn't worth the fuss to complain rather than waiting for the reserve to be reduced on the next report. But sometimes you can get decent money in your hands months earlier if you just take the time to look in the cookie jar.

Royalty Season, Spring

We are settling in after our move just in time for the arrival of royalty season.  In fact, some German royalties from Heyne, which were the first buds of the season or sprinkles of the monsoon or flakes of the blizzard arrived almost simultaneous with the move.

And I realize in six years of having Brillig, I've never spoken much about royalty season.

First, royalty season in the publishing industry doesn't arrive at the same time for everyone.  It isn't like spring or fall, but rather more like the last frost.

When I was at the Scott Meredith Literary Agency in the early years of my career, royalty season arrived on February 1 and August 1.  Random House was due to send out reports the last day of January and last day of August, and they were very nice about it.  They didn't entrust their big checks to the Post Office in order to get another day or two of float, but rather would messenger them over, though late in the day so the check couldn't make it to the bank for that day's deposit.  Carl Sagan -- Random House author.  Norman Mailer -- Random House author.  Margaret Truman -- Random House author.  All of the many Scott Meredith clients published by Del Rey -- Random House authors.  The Mists of Avalon -- Random House.  Blade Runner -- Random House.  2010 Odyssey 2 -- Random House.  So when Random House reported royalties, that was when we had royalty season.

At JABberwocky, the vast preponderance of our authors are published by the Berkley Publishing Group part of Penguin, which reports on/about March 31 and Sept. 30.  Charlaine Harris, Jack Campbell, Simon R. Green -- all NY Times bestselling authors with many many books, all Berkley Publishing Group.  Along with some of our Roc authors.  And DAW, with many of our other authors, usually sends statements along a few days after Penguin in April, and a few days before in September.

I think Scott Meredith had the better of it, because the Random House statements were a bit off from everyone else's.  It wasn't one super big season, but rather helped to spread it out a bit more.  For us, it's not just Penguin on March 31 and Tor on April 30 but most of our big German and UK statements that want to come in then along with lots of miscellaneous others.  Just about everything comes in between March 20 and May 10, and between September 15 and November 10.  Less than a third of the year with two-thirds of our royalty paperwork.

So that is royalty season.

This is going to be a series of posts, and if that's the introduction let's put up Chapter One now as well, which is to talk about what I saw when I looked at royalty statements at the start of my career.   It was a lot different, if also in some important ways not so different at all, from what I see now.

One very important thing to keep in mind in this entire discussion, so I will say here and repeat often in different keys:

Most of the books publishers send to bookstores can be returned to the publisher for credit.   So a book that is sold might not be.  To protect against paying royalties to authors for copies that bookstores might return, publishers are allowed to hold a reserve against returns.  We sent out 30 copies, we will reserve 10 or 20 that we feel have a reasonable chance of coming back.  So I am going to use "sold" in quotes here, because it was very much the case twenty years ago that the number of copies on a royalty statement was the "in quotes" version.

For Penguin or for Kensington, the number might be the number of copies "sold" in a given accounting period.  That number came on a little 5x7 (maybe, don't have any at hand) piece of paper that came off of a computer.  And there wasn't much more than that one number to look at.

Random House gave multiple numbers, the number of copies "sold" over the six months and the total number of copies "sold" to the end of the period.  Their number came on a big oversized piece of computer print-out paper which made it seem especially important and true.

Berkley gave their numbers on an 8.5x11 sheet of paper which made them easier to file.

DAW gave many numbers, since they did things by hand on a piece of paper that would be passed down from royalty statement to royalty statement like a revered scroll..  That paper would have rows, and the rows would have the date of the period, the number of copies sold to the end of the period, and then the next row either gave that number followed by the new number, or the number of copies "sold" over the six months which you would add to get the new number, kind of like one of those Scrabble score sheets that comes with the fancier sets.  The first number was always "too early to tell."

There wasn't a lot of mentoring or training at Scott Meredith, so it took me a long time to learn that all these numbers, from all these different publishers, no matter how official looking the sheet of paper was, were utter bullshit.

Why?

Well, the number was the result of an equation, and the equation itself was hidden.

The equation used to generate the number was:

(actual copies net after ship and return) (minus) (reserve against returns) (equals) (your number)

And all we got was (your number), either as a total at the end of the period or as the difference between (your number) in one period and the immediately prior period.

You'd walk into bookstores and see a book all over the place and wonder why (your number) was so small.  Well, (your number) was maybe a half or a quarter of the actual number of books the publisher had put into the marketplace.

A book would come out, not appear to sell, and when you got the second royalty statement (your number) went up.  Not because there were more copies, but because the hidden reserve against returns was reduced by more than the hidden copies shipped less copies returned.

It would take around four royalty periods, or around two years, before the magic number that appeared on the royalty statements was close enough to the actual performance that the statement could be considered reliable.

I got in the habit of calling my debut novelists when their first statements came out to tell them, very excitedly, that I had their first royalty statement, I would be sending it to them, and when they got it they could put it in the trash or use it for toilet paper or do pretty much anything except pay much attention to it because it was utter bullshit.

Now it's different, and we'll move on to that in the next post, tomorrow.