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Changing the Way Publishing Is Paid

The Society of Authors, an author organization in the UK, has cried that literary piracy is going to lead to the demise of literature because authors will eventually stop writing.

"For a while it will be great for readers because they will pay less and less but in the long run it's going to ruin the information. People will stop writing. There's a lot of "wait and see what the technology brings' but the trouble is if you wait and see too long then it's gone. That's what happened to the music industry.

Chevalier is right that the music industry has been trying to catch up instead of capitalizing on the market but she isn’t right that the music industry is dead or that it is dead because of piracy. There are still musicians playing long after Napster and iTunes swept the market. The truth is, though, that while the music industry profits have been shrinking, it’s hard to link that to the piracy issue. Koleman Strumpf argues that there is no empirical evidence that file sharing has harmed the music industry.

The question comes down to whether the publishing industry can change with the changing times and re-evaluate how money is made by both the house and its authors. HarperCollins is going to try out a new model that features an epublishing like business model. Essentially HarperCollins is going to pay less up front, not take returns, and pay more percentage wise to the author for each sale. Additionally, the studio is reported to be considering a free ebook / digital audio with the sale of a hardcover.

This is the epublishing model. In epublishing, you do not have returns. More importantly, there is no secondary resale market for ebooks. In epublishing there are no advances. Instead, authors agree to take on more risk in exchange for a greater reward. Instead of 6-8% of the cover price, an author might receive 35-40% of the retail price.

I’ve blogged before about how this model means that an author has to sell far less to make equal amounts of money. The problem is whether, without coop dollars spent on in store advertising (ie. front of store placement, face out, or end caps), these books from HarperCollins new model will be able to make a profit.

In August of 2007, Richard Charkin, the CEO of Macmillian, wrote a blog post advocating for the a change in the current royalty system. Right now both in the UK and the US, the negotiated royalty rate is based on the retail price. Charkin thought it might make sense and actually be more transparent to move to a system that is followed by educational and academic publishers which is the “almost universal application of royalties based on publishers’ gross income rather than retail price”. The uproar against Charkin was tremendous as several commenters claimed that royalties based on the retail price was the only transparency that is afforded an author. But Harper Collins is going to test that with its new system and also incorporate the argument made by Evan Schnittman of the Oxford University Press to do away with advances.

Schnittman followed up the Charkin post with a suggesting the elimination of advances and providing some evidentiary proof that advances could be breaking the back of the publishing industry. There are very few royalty checks that are sent out to an author. I heard once that some authors believe that this is the system that works the best: that the advances should also be higher than any earn out. This way you are never waiting for some royatly check but instead getting your money up front.

The problem, as Schnittman points out, is that because so few authors actually make money for a publisher, the costs of advances to the business of publishing could be harmful for its future. Schnittman proposes a flat fee to be paid along with a performance fee to be paid for sales of books. I.e., if the book sells more than its expected sell through, a performance fee of some amount would be paid with correlating to each incremental increase in sales.

This idea fascinates me. In the sports world, contracts are incentive laden. Make it to the playoffs? Increase in pay. Get an MVP? Get a bonus. Make it to the Pro Bowl or All Star game? Mo’ Money. In the book world, it would be making the NYT or USA Today list; maybe selling through 50% of the print run; even possibly winning an award.

It will be interesting to see what will come of HarperCollins test and what authors are willing to forego the advance in lieu of the profits. How will the profits be divvied per author? In law firms, profit sharing is a complicated (uber complicated) formula but essentially rests on how much money each partner brings in. So if an author of the HC studio brings in 40% of the revenue, would that author be entitled to 40% of the net profits? gross profits? How are advertising dollars split? Does everyone share equally with the costs or are the costs apportioned according to revenue as well?

What HarperCollins actions do signal is a willingness to test the market to see if there is a different way for authors to be paid in a traditional publishing setting. The next step will be to see how authors can be paid in a non traditional publishing setting. I’ve often felt that the high price of ebooks have a piracy tax built in. Maybe that is the direction the publishers will eventually take, a complete adoption of the epublishing model eliminating returns, the resale market, and include a built in piracy tax. Tracy Chevalier is correct. The publishing industry must evaluate the way in which publishing will need to adapt to the increasing digital world. The time to do that is now rather than ten years from now.

Jane Litte is the founder of Dear Author, a lawyer, and a lover of pencil skirts. She spends her downtime reading romances and writing about them. Her TBR pile is much larger than the one shown in the picture and not as pretty. You can reach Jane by email at jane @ dearauthor dot com

25 Comments

  1. Diana Peterfreund
    Apr 06, 2008 @ 08:54:39

    A lot of book contracts *do* have incentive bonuses built in. Advance bonuses that activate upon certain print runs, earn out, bestseller status, release of subsidiaries (films), etc.

    This description: “Schnittman proposes a flat fee to be paid along with a performance fee to be paid for sales of books. I.e., if the book sells more than its expected sell through, a performance fee of some amount would be paid with correlating to each incremental increase in sales” is, how most writers (and agents) I know think of their contracts, given the fact that most advances are calculated given a P&L sheet that says “this is how many we think we’re going to sell.” The advance is their payment for writing the book, and any royalties are a surprise bonus when they’re books perform better than expected.

    In a recently post about royalty statements, agent Kristin Nelson said: “Several authors have just earned out beyond their advances so they get ‘surprise’ money in the mail…” Does this sound markedly different than what Schnittman describes?

    One thing I haven’t seen focused on in the massive media blitz about the new HC imprint is how small it is. 25 books a year, all hardcover. This is an experiment, not a massive changeover of one of the big pubs.

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  2. Becca
    Apr 06, 2008 @ 08:55:19

    This is being discussed over on Making Light, too. The biggest concern seems to be that “Hollywood accounting” will make it so that no book ever makes enough of a profit to pay the authors anything. (Authors such as Jane Yolan and Will Shetterly chime in with their opinions)

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  3. Nora Roberts
    Apr 06, 2008 @ 09:46:36

    I wouldn’t be willing. ‘Hollywood accounting’ is the first and biggest reason.

    As the wife of a bookstore owner, I know the ‘no-return’ policy wouldn’t work for his independent. Or, it wouldn’t work for the many, many new authors and mid-list authors he could not risk ordering. I believe many other bookstores would be in the same position, therefore best-sellers, brand names, hot, hot books would likely do fine. Others, not so much. It would be the new and middle ground who lose sales and exposure.

    BTW, I get really solid advances–and I get royalties.

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  4. cecilia
    Apr 06, 2008 @ 10:02:34

    I’m not a publishing expert, but I seem to recall from my high school and university job in a book store that the “best seller” lists were based on what book store chains ordered, not what people actually bought. If that is the case, a contractual incentive to make those lists would seem not exactly fair, as lots of books sell far far less than what is anticipated (and ordered for). (I’m having a flashback to that Gone with the Wind sequel). However, I could be totally wrong about how it works, in which case, this was never posted.

    Also, a quibble – how come iTunes is lumped in with file sharing programs in a sentence about music industry destroyers? Do they not pass the money along to the appropriate parties?

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  5. Nora Roberts
    Apr 06, 2008 @ 10:14:02

    ~The problem, as Schnittman points out, is that because so few authors actually make money for a publisher~

    I don’t believe this is true. Yes, some books get inflated advances, then tank. But I think publishing would have been gone long ago if profits weren’t made. The author gets a percentage of sales, and the bookstores buy a book at 35-40 percent off cover. There is a slim profit margin for all, but a margin is there. Out of the 60 percent left for the publisher, an author gets 6-15 (depending) percent of the cover price in royalties.

    BTW, I just asked my guy how he’d handle a no-return policy. He told me he simply couldn’t order the book. He has overhead, and he has employees to pay. He can’t risk buying–doesn’t know how any bookstore could risk buying–new or unknowns, then having to eat the full shot when the book doesn’t sell.

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  6. Gennita Low
    Apr 06, 2008 @ 10:50:09

    Just thoughts, after reading the article:

    Why not just self-publish and get 100 percent profit? Also, who’s defining profit after expenses? Them? I’d like them to let me see the profit/expense sheets if we’re truly partners. ;-) Privileged information? I thought so.

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  7. Ann Bruce
    Apr 06, 2008 @ 11:13:58

    The problem, as Schnittman points out, is that because so few authors actually make money for a publisher

    I’ve seen estimates that 70% of books don’t earn out their advance. It’s almost the 80-20 rule.

    BTW, I get really solid advances-and I get royalties.

    But you’re NR. You probably bring in enough revenue to make up for the other 70%.

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  8. Caroline
    Apr 06, 2008 @ 11:16:53

    In the sports world, contracts are incentive laden. Make it to the playoffs? Increase in pay. Get an MVP? Get a bonus. Make it to the Pro Bowl or All Star game? Mo' Money. In the book world, it would be making the NYT or USA Today list; maybe selling through 50% of the print run; even possibly winning an award.

    I have to point, in addition to Diana’s comment that there already are bonus clauses in publishing contracts, that your analogy to sports misses that sports bonuses come on top of a salary, not in lieu of it. So a player who isn’t MVP, doesn’t make the Pro Bowl, doesn’t win ROY, etc., he still gets paid. And the bonuses are often small compared to the salary–this publishing model flips that, with a small or even non-existent advance and *potential* bonuses.

    I'd like them to let me see the profit/expense sheets if we're truly partners. ;-) Privileged information? I thought so.

    I agree. And if we’re truly partners, shouldn’t MY expenses also be reimbursed and paid out before any profits are shared as well? Can’t write the book if Keyspan turns off the power…

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  9. joanne
    Apr 06, 2008 @ 11:27:51

    This idea fascinates me. In the sports world, contracts are incentive laden. Make it to the playoffs? Increase in pay. Get an MVP? Get a bonus. Make it to the Pro Bowl or All Star game? Mo' Money. In the book world, it would be making the NYT or USA Today list; maybe selling through 50% of the print run; even possibly winning an award.

    Can we please not base book publishing on anything done in the sports field? Sports page after sports page with articles about seats that are too expensive for the average family and sodas that costs $8 in stadiums while owners pay exorbitant salaries to continually non-performing players should tell the tale of not following in those particular footsteps. Ditto anything to do with accounting in Hollywood… just ask the writers there about that.

    I am once again confused by all these plans. I have no idea how any of this works for the betterment of authors and their incomes, but I think it’s being made way too complicated to actually work well for any writer wanting to see financial returns on their investment of talent and sweat.

    Why can’t they (the publishers) cut the costs of the actual printing and/or producing rather then the financial returns to the writers? Why hurt the golden goose and all the golden geese trying to get published? (okay, too much there but I never said I could write (or review), I am an avid reader and buyer of all things delicious in the romance/romantic suspense/ mystery fiction lines) .

    I am also one of the first to stand in line and say “oh yeah, squee, hot body mantitty cover” but I can do without it. I can. Really. *sigh*

    Can’t we really do without advertising other then word of mouth and author and reviewer sites. We don’t need step-back covers, hot models, not-so-hot-computer-generated covers, or any other bells and whistles that lead us to a good book. TV commercials, paper ads, magazine layouts, video previews, are all fun, but they aren’t necessary to the sale of a good book.

    There has to be a simple technology that would keep an ebook from being pirated…. there really has to be some teen aged hack who has the solution but can’t find someone to buy it from him/her. Cripes, they hack into banks and government sites all the time, they must know how to protect a simple form or ebook without blowing up the buyer’s computer.

    And if readers want to return a book then they can use the library, not a local bookstore. How hard is that to put into action?

    And books always use to sell based on the contents, not on the outside fluff. They all had simple covers with the title and author’s name. Some people who could afford it got leather bindings or boxed imprints, but not the average buyer. We would miss the fluff, but not the content which would be the point, no?

    Is that all too simplistic? Am I missing the reason why the writers need to take a hit rather then the publishers cutting costs in other ways? I’m pretty sure I’ve missed the point, but my heart is in the right place: with the authors and writers that make my free time pleasurable.

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  10. Nora Roberts
    Apr 06, 2008 @ 11:38:08

    Let me just add that a book doesn’t have to earn off to make a profit for the publisher. That would be flawed thinking. Lots of books don’t earn off–I don’t know if it would be 70% (seems very high)–but many of those books still make a profit for the publisher.

    Mega Author is given 15 million advance. Book sells hugely, but Mega Author doesn’t earn off. Royalties only come to 12 million. Three million unearned. Believe me, publisher made a very nice profit on the couple million hardcover sales, and double that soft cover sales. And their share of the bookclub sales, audio sales, serial rights, etc. Mega will not receive a royalty check, but got all his money, plus a little more, on the front end. Publisher is very happy with Mega.

    Now if Mega only earned back half that advance, publisher feels serious sting.

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  11. Shiloh Walker
    Apr 06, 2008 @ 12:05:00

    I think the comment I’d posted earlier got eaten by spam.

    Anyway, I think I said it was an interesting concept and I’m curious about how it would turn out.

    However, i wouldn’t want to do it. I like my advances.

    Regarding the mess with piracy, I don’t even want to think about that one. It’s depressing. Since I still have so much of my income coming from epubs, I’m feeling the hits from piracy and yes, I do believe it’s had a big effect. I blogged about that topic not too long ago. Filesharing has soared over the past year or so, and my epub income has gone down. It isn’t because I’m not putting out books either, because I am.

    it could be a combination of things, market oversaturation, etc, but I do believe piracy plays into it a lot. Sometime soon, I’m going to have sit back and decide whether it’s financially in my best interest to keep doing epubs. I’m not trying to be greedy, but I write ebooks expecting compensation and all the piracy out there is affecting that. If 2008 continues as 2007 went, I’m probably going to start exploring other projects and focus more on my print career.

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  12. Robin
    Apr 06, 2008 @ 12:25:10

    I think the comment I'd posted earlier got eaten by spam.

    No, it’s just posted in another thread. Here it is:

    Interesting idea~I'm curious to see how it pans out.

    I'll admit flat-out that piracy is part of why I'm not writing as much for my epubs. Filesharing sites have soared over the past year, and incidentally, my income has gone steadily down from my epubs. It isn't because I'm not putting the books out, because I am. But still, it's dropping. Could it be from something other than piracy? Market saturation, etc? Again, possible and it could be a combination of both.

    I blogged about this not too long ago and I suspect in the coming year, I'm going to have to make a decision~either keep writing for my epubs as well as my NY pubs, or just focus solely on my print career. It's not a choice I want to make, but I'm sick and tired of my work being pirated. I sell my books expecting compensation. I'm not trying to be greedy but I do expect my rightful compensation when my books are read. Seeing how many people flagrantly ignore my right to that compensation has me reconsidering that aspect of my career.

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  13. Robin
    Apr 06, 2008 @ 12:38:19

    But you're NR. You probably bring in enough revenue to make up for the other 70%.

    One thing I’ve had to learn is that big earning authors really do help fund all sorts of other endeavors by a publisher, whether that be lit fic authors or new/evolving genre authors. So even as we’re wondering aloud how author A continues to sell so many copies, in a way she’s doing us readers a favor because she’s helping make the publisher profitable enough to keep authors who aren’t such big sellers (yet or ever).

    In regards to the article as a whole, IMO publishing is EXTREMELY reactive rather than proactive, and that’s something we’ve seen over and over and over and over again, from Savage Gate to ebooks to pricing structures. Personally I have problems with the way that digital technologies are being utilized to undermine certain aspects of copyright laws (spend some time at the Electronic Frontier Foundation for details), but beyond that I definitely think that publishers, authors, and agents should be innovators here, not mimics.

    Each cohort has something different to offer to the process, a different perspective and investment, and although I’m not much of a Chicken Little pessimist, I do think that actively participating in change allows one to be in a more powerful place than simply trying to adapt to it. Agents, especially, it seems to me, have a valuable role to play here, because they are routinely negotiating between authors and publishers, and, ideally understand both sides of that equation (i.e. they work the innate competition between authors and publishers to the advantage of both). Has anyone thought to form some kind of industry think tank on this, for example? Or even some kind of research committee?

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  14. Sarah
    Apr 06, 2008 @ 13:34:26

    I don’t know a single independent bookstore that will buy non-returnable books. Maybe the big guys can afford it, but we sure can’t.

    It’ll be interesting to see if they offer a bigger discount to the bookstores to try and sell this line…

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  15. Rosario
    Apr 06, 2008 @ 14:33:58

    I can’t see this as being good, not as a whole and not for the authors. It all seems to be about passing on more of the risk from the publishers to them. And as clearly, the authors will always be significantly more risk-averse (for starters, an individual author will have a very limited number of books out there, while the publisher will have so many more, with the ones that are doing very well hopefully compensating for the underperforming titles), this should result in a global loss of utility (the publishers should gain less utility as a result of having less risk than the sum of all authors should lose for having more).

    I also question whether an author receiving a percentage of book sales should be seen as an incentive. Incentive to do what? In this business, doesn’t the “performance” come before the book is released, when the author is writing and editing it? After the release, is there really all that much that a print author can do? Can a smallish author afford to do enough promotion that it really makes a difference in the sales?

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  16. Meghan
    Apr 06, 2008 @ 15:45:58

    In epublishing there are no royalties.

    Presumably you mean advances–the whole epub model is based on royalties instead of advances.

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  17. Christine Merrill
    Apr 06, 2008 @ 16:00:26

    Can a smallish author afford to do enough promotion that it really makes a difference in the sales?

    Sure. She can use her advance money for that.
    Oh, wait…

    Final earnout on a book can have more to do with promotion and distribution than the actual quality of the writing. So in this new business model, the author can write a fabulous book. But if the publisher decides not to promote it, or institutes something that will effect distribution (like a no return policy) the book will not sell well.

    And getting a large advance is a sign that the publisher will devote advertising dollars to the book. They are out money, up front, and they need to make it back. With no advance, the publisher has less to lose if they limit publicity.

    So it looks like a downward spiral to me. There are lots of ways that this method might negatively impact sales. And when sales go down, the author gets more blame and less money than she would have, had she gotten an advance.

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  18. Seressia
    Apr 06, 2008 @ 17:03:47

    Chevalier is right that the music industry has been trying to catch up instead of capitalizing on the market but she isn't right that the music industry is dead or that it is dead because of piracy. There are still musicians playing long after Napster and iTunes swept the market.

    But bands tour, because that’s where they make their money. Top-performing athletes get endorsement deals. What would the author be able to do?

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  19. Karen Templeton
    Apr 06, 2008 @ 18:24:18

    ::But bands tour, because that's where they make their money. Top-performing athletes get endorsement deals. What would the author be able to do?::

    Exactly. Performing artists have other revenue options — concerts, endorsements, even gear/products. Writers have their books. Period.

    If the books don’t sell, we don’t make any money.

    And advances are the only guarantees we have that we will.

    A split of the net profit? By whose accounting? And on a book that precious few booksellers would stock because they can’t return it?

    I’ll pass, thank you.

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  20. Jackie
    Apr 06, 2008 @ 20:00:30

    Hey, if there are no returns allowed, does this mean that authors would get all of the money set aside in the reserve against returns? Really? Or, hmm, would there be another reserve fund — perhaps a reserve against ad sales?

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  21. Shiloh Walker
    Apr 06, 2008 @ 20:54:21

    I think the comment I'd posted earlier got eaten by spam.

    No, it's just posted in another thread. Here it is:

    Heh. I’m a ditz. This is what happens when I try to think too early after staying up way too late.

    Thanks, Robin!

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  22. Karen Templeton
    Apr 06, 2008 @ 21:15:02

    ::Hey, if there are no returns allowed, does this mean that authors would get all of the money set aside in the reserve against returns? Really? Or, hmm, would there be another reserve fund -’ perhaps a reserve against ad sales?::

    No, there’d still be reserves…and they could go on indefinitely, until the publisher determines that the book is actually in the black. That’s the huge problem with “net” anything — that all the expenses are taken off the top BEFORE the author sees any money. And s/he has no way of knowing what those expenses are. The opportunity for abuse here — intentional or not — are enormous.

    Publishers aren’t real keen on full disclosure now. Can you imagine what it would be like to get a complete accounting under this scenario?

    To expect someone to supply you with the product by which everyone else makes their living, but with no guarantee that the supplier ever sees a penny, is downright ludicrous.

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  23. stephanie feagan
    Apr 06, 2008 @ 23:09:04

    This whole scenario makes my CPA soul run for cover and scream for mercy. I’m thinking of all the costs associated with publishing a book – from the G&A of electricity, to the file folders where they house your pathetic contract, to the cost of paper. I’m imagining an agent beating out the details of said contract, thinking this is way the hell too much work for a lousy fifteen percent of…oh, wait. She gets fifteen percent of nothing, until everyone, including the night guard and the cleaning staff, have earned their money.

    My regards to Bob Miller, who is undoubtedly a brilliant and successful man. I very much admire his ability to think outside the box, especially over cocktails. But I have to call it how I see it – and my professional CPA opinion, coupled with what I know of the publishing industry and human nature, tells me the chance of success with this business model is slim to none. There are far too many variables, and the incentive of a working living is taken away.

    The PM article did mention that Miller said he would pay a ‘small’ advance. It may be that to a man like Bob Miller, ten or twenty grand is a ‘small’ advance. In truth, until more information is available, it’s difficult to discuss this with any kind of serious bent.

    But it’s hella easy to discuss it with a serious emotional bent. Argh!

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  24. Chicklet
    Apr 07, 2008 @ 09:11:48

    Why can't they (the publishers) cut the costs of the actual printing and/or producing rather then the financial returns to the writers?

    Because when the publishers try to cut the production costs too much, people complain about the quality of paper/bindings/cover design, and when publishers try to bypass even more production costs by making ebooks available, few people buy them. That sounds very flippant, for which I apologize. I’m not a writer, so I don’t have a stake in this experiment, but I do see that the economies of other media are changing drastically, and therefore understand why the publishing industry has to reexamine its business model and experiment with new set-ups.

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  25. Patricia Rice
    Apr 07, 2008 @ 19:23:46

    another accountant chiming in (hi, Stephanie!)…

    While I agree that the accounting model for publishing, like much of the rest of the industry, is in sad need of overhaul, changing to an e-publishing model is not in the best interest of anyone.

    I don’t believe anyone has mentioned the “incentive” factor of author advances. If a publisher need only cover their own costs (including salaries and a profit to shareholders), where is their incentive to spend money on promotion? Knowing they have to cover author advances forces them to provide the best possible promo for the P&L they’ve developed for each book. Without advances and promotion, authors may as well self publish.

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