The author of the following article didn’t want to get involved in the “publisher vs editor” fight currently ongoing over at MacMillan and Amazon. Then he proceeded to write a lengthy article claiming that 25% of e-book royalties to an author is fair. After my laughing died down, I proceeded to actually think about it.

Then I started laughing again. My comments are (interspersed).

Michael Bhaskar outlines why publishers believe 25% of receipts to be a fair ebook royalty

It can hardly have escaped Bookbrunch readers’ notice that even for the exposure-hungry world of digital publishing things have kicked off in a big way. First, The Wylie Agency launches its own imprint, Odyssey Editions, selling backlist titles of big name writers exclusively through Amazon Kindle, by-passing publishers en route (Totally legit and, IMO, a decent idea to fight against the absolute ridonkulous theory that publishers believe that they own rights to everything which orbits our sun). Then publishers, enraged at a move seen as undermining their investment and work (from editorial to publicity and everything in between) hit back, with Random House publicly announcing that it is curtailing business with the agency, and Macmillan US CEO John Sergent denouncing the move on his company blog (Of course they would. The last thing publishers want in a tough economy is cheaper, better competition, or for creative people who write these books to skip them entirely.). HarperCollins has expressed anger over the move (Again, duh). This is not to say the noise has been one sided – on the Futurebook blog, agents have been making the case that this development is actually largely the fault of publishers (Agreed). An unfolding game of strategic plays and counter-plays is unfolding on the chessboard of Anglo-American publishing (If you think it’s strictly limited to Anglo-American publishing, you need to look around the industry some more. It’s an ongoing battle for all publishers, be they “white” or whatever.), with no clear sides, rules or outcomes yet apparent (There are sides. You’re either for authors or for publishers. This is the best case of black and white I’ve ever seen. But let’s muddy the waters a bit, cast some confusion out into the realm of man. People are easily distracted).

At the heart of this is one question: what is a fair way to split digital revenue? (The best way? Where the author can get what they earn from the book while the publisher makes money as well. You take it out of the hands of accountants and it could be a lucrative business for both sides. No offense, Larry.) There is a commonly understood industry standard royalty of 25% of net receipts (Hah! My ebook royalties start at 40%. Pikers…). Many agents feel this is not enough (Damn right it’s not. It’s highway robbery.); publishers are drawing their lines in the sand, believing this already to be a step back from the 15% net receipts many originally wanted (Because 15% of something that costs publishers very little to put out electronically is such a great deal to the writer, who oftentimes sees maybe 5% royalties on a book which costs $30 in hardcover. That’s assuming, of course, that they didn’t receive an advance and will never see a dime in royalties. Again, I can see why publishers would only want to give someone… $0.75 per ebook sold when the greedy author already receives $1.50 for every hardcover sold. Hope you aren’t planning on making a career out of this “writing” gig, lady.).

Suffice to say that it would be unwise for me to enter this debate (too late), and I have no intention of doing so (liar). What I can do is hope to illuminate some of the costs publishers incur when they embark on a digital program (Oh, goody. Enlighten me!), and give a sense of why they believe this 25% net receipts royalty is fair within the context of those costs (Wait, what do you do for a living again?).

The main argument for why royalties should be higher in digital seems to be that, given we don’t have a physical book, the costs to the publisher must be so much lower (It is. No storage fees, no printing fees, no page setting fees, cheaper cover art costs, distribution is nil, etc…). This is very easy to answer. The per unit cost of printing a book is, in most cases, not where the majority of a publishers’ costs are directed (It’s not? Strange… That’s the recurring excuse I’ve heard for years at why big houses don’t want to put out many new authors). They are directed at overheads (Typesetting, printing, storage… we covered this already), at editorial and editorial management (The big houses have interns -unpaid interns- slaving away during their summers to edit and proofread books. Mid-sized houses look for independent contractors to edit their books from anywhere aroind $250-$500. Not cheap, but compared to what they want to pay out in royalties, still cheap enough), at sales (Huh?), marketing and publicity (This one made me giggle. If you’re shelling out that much for marketing and publicity, then why are you staying strictly in the e-book format? If you’re going to take a loss because of publicity, then you obviously need your author to do more book signings and need a better PR department. The internet, man, is the best way to virally advertise in the world. You can get an ad up on, say, Facebook for $35.00 for a year.). Regardless of whether you have a print book or not, these costs are absolutely consistent (Uh, no… only if your publishing sense is still a stick in the mud.). So really the only difference we can talk about is the marginal print cost difference (It’s not marginal, it’s significant), only a fraction of a book’s total cost.

Moreover there is then a whole new set of costs associated with digital (There are?). First, you need people, such as myself (Aha! Now we’re getting to the root of his opinion.), to manage, develop and grow this new area (E-books aren’t new. You’re just slow and still use a stone tablet and chisel to send letters with.) and put in place the foundations for strong publishing companies that will last the next 50 years (In fifty years, if we haven’t found some new to publish with, I’d be surprised.). Second, there is the cost of conversion of an ebook, which although small still has an impact if sales volumes are low, as they are for many ebooks (*cough cough* What? You guys don’t have your clients submit to you in .rtf or .doc files? No wonder this is burdening). Third, there is then a host of distribution systems (Who are keeping their distribution separate and differentiating so people will not be able to lock down one type of DRM and hack it. Which, in turns, drives business away. This has been proven multiple times over by Eric Flint, John Scalzi, etc.), business system upgrades and additions and new digital production software requiring investment. People might argue that this is a one-off cost, and once amortised should then be factored out. Yet this fails to understand the nature of most software agreements, which work as SaaS (software as a service) arrangements, whereby the software is leased on a usage fee basis (DRM – Digital Rights Media. This is, as always, the final argument that publishers have and is the weakest. If people want the damned book badly enough, they’re going to get it one way or the other. DRM only hurts your viral publicity campaign by not allowing a woman to send her e-copy of her newest favorite book to her friends. We loan books to people all the time. I’m surprised publishing houses haven’t tried to DRM a friggin’ hardcover book yet…). So in fact as time goes by and we use these new systems more, we will have to pay more, in absolute terms. Even basic technology can subsume surprisingly large chunks of income – DRM (Digital Rights Management) for example can eat as much as 7-9% of a book’s RRP (Get rid of DRM and voila! More sales of books. 1+2=3, I promise.), although this would usually not be felt by the publisher (If not felt by the publisher, then why the fear of people skirting around it? *sigh*).

The breakdown of an ebook, then, is remarkably similar to a print book (I still don’t see the costs of storage and distribution eating your profits…). Let’s suppose for the sake of argument that we make a very small saving on each ebook – at most it would be no more than 5% of RRP. However, this is subsequently completely destroyed by the VAT (VAT Tax? Oh, this makes much more sense now. You’re from the UK. You guys have screwed your authors so horribly over there that they now only make the majority of the money from sales on the US side of the Atlantic. Hell, Rowling’s UK publisher took a massive hit on the Harry Potter books on distribution until Scholastic came along and took over the distribution here in the US), now about to be set at 20% (And politicians here in the US want a VAT Tax… morons). Any potential saving is more than wiped out, as we are always making 20% less (You are on print books. E-books, well… that’s a different story. I wish I could convince Tom from Tor Books or Toni from Baen Books to let me look at what their percentage savings are whenever they release a DRM-free e-book). If there is any belief that the retailer environment for ebooks will be any less competitive than for print then people are very wrong (Yes, retailers bidding against each other for the right to distribute your e-book. God, that’d be just horrible! If you can’t taste the sarcasm yet, let me know.). What this amounts to, inclusive of the 25% net receipts author royalty, is a business model that just about holds its head above water (Better than a loss, which is what publishers suffer in the print market. But I digress…) and contributes enough back to a publisher to cover the costs incurred, most of which are nothing to do with an ebook (Ah… So you are trying to justify a 25% royalty on costs which you are attempting to defray from print books by passing the costs over to e-books. Frackin’ accountants…). All of this comes before we even get to further associated costs: the costs of developing new (Huh?), often risky (I’ve seen what Harlequinn puts out, I doubt you can top that.), experimental kinds of product (…unless you’re making an e-book that can direct viewers to a porn website for a free month, in which I applaud your ingenuity) to find the markets of tomorrow (i.e., children, which explains the porn links… you perverts), frequently working with programmers and designers unfamiliar with publishing budgets (Programmers generally don’t mess with some funky new e-book but the distribution system at, say, Amazon. I doubt some programmer is going to agree to work for as little as a publishing house is going to pay them unless that’s the person who is running the website already.); the new costs of digital marketing (Again, if done right, there should be little costs in digital media), sometimes erroneously bundled into the mythical land of free (Not free, just cheap. Think outside the box, dear Padawan.); the potential loss of revenue due to piracy (Loss of sales from piracy? Wow, you really believe that the RIAA has lost millions of dollars because of piracy and not a crappy product? Wow…), copy infringement and, yes, disintermediation (Not even worth the time).

For books to thrive they need good publishers (I agree); this is equally true of ebooks (Incorrect), and if publishers are making a loss on digital products (Publishers who are claiming a loss on digital publishing are cooking the books a bit) then it will increasingly undermine not only their ebook business but ultimately their print books, and beyond that the whole ecosystem of reading and writing (False. As long as people write something, there will be someone there to read it. Even the most horribly written book has been read by more than three people.).

Michael Bhaskar is Digital Publishing Manager at Profile Books (Ah. That explains much).

In the end, the argument comes down to piracy and distribution. As long as books are “protected” by DRM, so publishers believe, sales will not suffer and they will be able to squeeze every last bit of blood from the stone. And the arguments for e-book distribution is poorly thought out. If publishers are afraid of new costs, they need to remember that they are shedding even more costs by having everything shipped “electronically”.

Thoughts?

*EDIT* Italian Agent Roberto Santachiara chimes in about e-books and the 25% “threshold” which seems to be the minimum staking grounds for publishers. He’s urging his clients to not take 25% and to ask for more. Click here for more information.