E Book Royalties

eBook Sales Figures In 2009

eBook sale figures almost quadruple in January 2010 compared to the same time in
$31,900,000 in January 2010. January was also the biggest e-sales month ever (The last
record was achieved in December 09: $19,100,000). This data refers to the US only, so
we can assume numbers are much bigger worldwide.

1. E-Book Royalty Math: The House Always Wins

February 3, 2011. Authors Guild

http://www.authorsguild.org/advocacy/articles/e-book-royalty-math-the-big.html

E-book royalty rates for major trade publishers have coalesced, for the moment, at 25%
of the publisher’s receipts. As we’ve pointed out previously, this is contrary to
longstanding tradition in trade book publishing, in which authors and publishers
effectively split the net proceeds of book sales (that's how the industry arrived at the
standard hardcover royalty rate of 15% of list price). Among the ills of this radical pay
cut is the distorting effect it has on publishers’ incentives: publishers generally do
significantly better on e-book sales than they do on hardcover sales. Authors, on the other
hand, always do worse.

How much better for the publisher and how much worse for the author? Here are
examples of author’s royalties compared to publisher’s gross profit (income per copy
minus expenses per copy), calculated using industry-standard contract terms:

“The Help,” by Kathryn Stockett

Author’s Standard Royalty: $3.75 hardcover; $2.28 e-book.
Author’s E-Loss = -39%
Publisher’s Margin: $4.75 hardcover; $6.32 e-book.
Publisher’s E-Gain = +33%
“Hell’s Corner,” by David Baldacci
Author's Standard Royalty: $4.20 hardcover; $2.63 e-book.
Author’s E-Loss = -37%
Publisher’s Margin: $5.80 hardcover; $7.37 e-book.
Publisher’s E-Gain = +27%

“Unbroken,” by Laura Hillenbrand

Author’s Standard Royalty: $4.05 hardcover; $3.38 e-book.
Author’s E-Loss = -17%
Publisher’s Margin: $5.45 hardcover; $9.62 e-book.
Publisher’s E-Gain = +77%

So, everything else being equal, publishers will naturally have a strong bias toward e-
book sales. It certainly does wonders for cash flow: not only does the publisher net more,
but the reduced royalty means that every time an e-book purchase displaces a hardcover
purchase, the odds that the author’s advance will earn out -- and the publisher will have
to cut a check for royalties -- diminishes. In more ways than one, the author’s e-loss is the
publisher’s e-gain.

Inertia, unfortunately, is embedded in the contractual landscape. If the publisher were to

offer more equitable e-royalties in new contracts, it would ripple through much of the
publisher’s catalog: most major trade publishers have thousands of contracts that require
an automatic adjustment or renegotiation of e-book royalties if the publisher starts
offering better terms. (Some publishers finesse this issue when they amend older
contracts, many of which allow e-royalty rates to quickly escalate to 40% of the
publisher’s receipts. Amending old contracts to grant the publisher digital rights don’t
trigger the automatic adjustment, in the publisher's view.) Given these substantial
collateral costs, publishers will continue to strongly resist changes to their e-book
royalties for new books.

Resistance, in the long run, will be futile. As the e-book market continues to grow,
competitive pressures will almost certainly force publishers to share e-book proceeds
fairly. Authors with clout simply won’t put up with junior partner status in an
increasingly important market. New publishers are already willing to share fairly. Once
one of those publishers has the capital to pay even a handful of authors meaningful
advances, or a major trade publisher decides to take the plunge, the tipping point will
likely be at hand.

Our assumptions and calculations for the figures above follow.

--------------------------------------------------------
Doing the Numbers: Hardcover

To keep things as simple as possible, we assumed that for hardcovers: (1) the publisher
sells at an average 50% discount to the wholesaler or retailer (2) the royalty rate is 15%
of list price (as it is for most hardcover books, after 10,000 units are sold), (3) the average
marginal cost to manufacture the book and get it to the store is $3, and (4) the return rate
is 25% (a handy number -- if one of four books produced is returned, then the $3
marginal cost of producing the book is spread over three other books, giving us a return
cost of $1 per book). We also rounded up retail list price a few pennies to give us easy
figures to work with.

“The Help,” by Kathryn Stockett has a hardcover retail list price of $25. The standard
royalty (15% of list) would be $3.75. The publisher grosses $12.50 per book at a 50%
discount. Subtract from that the author's royalty ($3.75), cost of production ($3), and cost
of returns ($1), and the publisher nets $4.75 on the sale of a hardcover book.

“Hell’s Corner” by David Baldacci, has a retail list price is $28. The standard royalty is
$4.20; the publisher's gross is $14. Subtract royalties ($4.20), production and return costs
($4), and the publisher nets $5.80.

“Unbroken,” by Laura Hillenbrand has a hardcover list price of $27. Standard royalties
are $4.05. The publisher's gross is $13.50. Subtract royalties of $4.05 and production and
return costs of $4, and the publisher nets $5.45.

Doing the Numbers: E-Book

E-book royalty rates are uniform among the major trade publishers, but pricing and
discounting formulas fall into two camps: the reseller model favored by Amazon
(Random House is the only large trade publisher using this model) and the agency model
introduced by Apple a year ago. (See yesterday’s alert for more information on these
models.)

Under the reseller model, the online bookseller pays 50% of the retail list price of the
book to the publisher and sells the book at whatever price the bookseller chooses (for
bestsellers, Amazon typically sells Random House e-books at a significant loss). Random
House frequently prices the e-book at the same price as the hardcover until a paperback
edition is available.

Under the agency model, the online bookseller pays 70% of the retail list price of the e-
book to the publisher. The bookseller, acting as the publisher’s agent, sells the e-book at
the price established by the publisher, but the publisher is constrained by agreement with
Apple and others to set a price significantly below that for the hardcover version.

The unit costs to the publisher, under either model, are simply the author’s royalty and
the encryption fee, for which we’ll use a generous 50 cents per unit.

Here’s the math:

“The Help” has an e-book list price of $13 and is sold under the agency model. Publisher
grosses 70% of retail price, or $9.10. Author's royalty is 25% of publisher receipts, or
$2.28. Publisher nets $6.32. ($9.10 minus $2.28 royalties and $0.50 encryption fee.)
“Hell’s Corner” is also sold under the agency model at a retail list price of $15 list price.
Publisher grosses 70% of retail price, $10.50. Author's royalty is 25% of publisher
receipts, or $2.63. Publisher nets $7.37. ($10.50 minus $2.63 royalties and $0.50
encryption fee.)

“Unbroken” is sold by Random House under the reseller model at a retail list price of
$27. Publisher grosses $13.50 on the sale. Author’s royalty, at 25%, is $3.38. Random
House nets $9.62. ($13.50 minus $3.38 royalties and $0.50 encryption fee.)

2. Digital Book World: e-Royalties, Amazon and the Shape of Things to Come

By Calvin Reid Publisher’s Weekly, January 27, 2011

http://www.publishersweekly.com/pw/by-topic/digital/conferences/article/45926-digital-
book-world-e-royalties-amazon-and-the-shape-of-things-to-come.html

In what has become a crowded digital conference circuit, Digital Book World seems to
have solidified its importance to the industry with an impressive turnout. DBW closed out
this year’s programming with a grab bag of presentations at the end of the day that
featured the results of a Mike Shatzkin poll of agents on e-book royalties; an
Amazon.com presentation on e-book as well as print sales; and a roundtable discussion
attempting to project the shape of the publishing landscape to come.

Publishing consultant Shatzkin, among the organizers of Digital Book World, offered
some interesting responses from a blind poll of 130 agents on e-book royalties (along
with publisher responses to agents), certainly one of the hot button topics in an industry
in transition from print to digital. Among the result, Shatzkin noted that ¾ of agents
believe an author should have one publisher for both electronic and print; that most
agents, unsurprisingly, believe a 50% e-book royalty rate is “fair,” and that most
publishers thought that 25% of net ebook receipts, the generally accepted e-book royalty
rate today, was fair. Shatzkin pointed out that older houses with big legacy print backlists
were much more reluctant to want to go above 25% rate.

Not surprisingly he said the highest royalty rates were paid by digital-only publishers,
houses that don’t have a large print backlist. He said that 1/3 of the agents have deals
over 25% for e-book royalties and half the agents said they have deals with larger e-book
royalties on backlist titles. And while 90% of the agents said their authors are interested
in self-publishing, publishers are generally not worried, Shatzkin said, because they
believe their ability to offer advances will keep authors coming to them. Finally, Shatzkin
emphasized that he believes the 25% e-book royalty rate “will stick for awhile,” at least
until print sales fall below 50% of publisher revenue.
Russ Grandinetti, Amazon.com v-p of Kindle Content, offered a series of observations
about the impact of digitizing on print and e-books sales. He noted that the Kindle is
being sold in more than 100 countries and Kindle consumers buy 3 times as many books
as their print consumers, emphasizing that “digital is coming faster than you think.” He
noted the importance of preorders to Amazon, “24% of print sales happen before the
street date,” and pointed out that during the first 30 days a new digital book is available,
it drives sales of the backlist. And he highlighted the rising popularity and quality of POD
copies produced through Amazon.com, which have risen from less than 500,000 POD
copies produced in 2006 to nearly 3 million copies produced in 2010.

And the day and DBW came to a close after a wide ranging conversation between
Shatzkin, Random House’s Madeline McIntosh, literary agent Simon Lipskar,
Sourcebook founder Dominique Raccah and Publishing Lunch’s Michael Cader. The
topic was “where will we be in 12 months,” and at least one point that was unanimously
agreed upon was that publishing revenues will likely be at least half digital by 2014.
While McIntosh noted that the 50/50 digital/print split has been a benchmark for planning
at Random House for some time, she also emphasized that indeed some categories have
already reached that mark. “For a big house like Random,” McIntosh said, “the challenge
is to learn how to manage a split market.” Lipskar made the point that the digital/pring
split affects authors differently, noting that some authors have big digital followings
while others do not.

McIntosh also emphasized the importance of accurate, timely metadata to marketing,

highlighting the need for scalable marketing strategies over what she believed was an
overemphasis on focusing on marketing individual authors and collecting specific e-mail
names and addresses. Nevertheless, Lipskar said he believed that “getting authors in more
direct relationships to their fans,” was one of his big goals in the next year and pointed to
Rebecca Skloot’s efforts (and to the PW profile of her) using social media of all kinds to
promote, The Immortal Life of Henrietta Lacks f before publication. And Raccah pointed
to the importance of “testing covers, testing titles, experimenting and getting comments
and feedback” to guide a digital publishing program and joined with McIntosh in
pointing to world English rights and the potential for finding growth on the global
marketplace.

3. Amazon jacks up e-book royalties ahead of Apple's tablet release

By Matt Hamblen, Computer World, January 20, 2010

http://www.computerworld.com/s/article/9146618/Amazon_jacks_up_e_book_royalties_
ahead_of_Apple_s_tablet_release

New 70% royalty for authors on Kindle would mirror AppStore royalties
Computerworld - Amazon.com today said authors and publishers will get a higher royalty
on books using the Kindle Digital Text Platform (DTP) starting June 30.

The new 70% royalty more than doubles what Amazon currently pays in royalties. The
increase was widely seen as Amazon.com's attempt to pre-empt the impact of Apple's
entry into the e-book market with a new tablet device that many believe will be
announced next Wednesday.

Google has also announced a Google Editions e-book concept that should launch later in
the year, using a variety of devices.

Amazon could not be reached for comment immediately, but said in a statement that an
author would make $3.15 on today's standard option on an $8.99 book, or slightly more
than 30%, which would increase to $6.25 with the new 70% option. The 70% royalty will
exclude delivery costs, based on file size that is priced at 15 cents per megabyte.

The standard option will continue, and to qualify for the higher 70% option, books must
be priced at between $2.99 and $9.99 and initially will only apply to books sold in the
U.S. It is unavailable for books published in the public domain, before 1923.

Apple offers its application developers a 70% royalty on apps sold in its App Store,
which includes some digital books. Google is planning a 63% royalty for Google
Editions. Authors of physical books typically receive royalties in the range of 7% to 15%
of the prices set by publishers, and about 25% of the net amount that publishers receive
from retailers of their digital books, a Kindle official said in a statement.