E-Book Royalty Math

Report from Authors Guild Inc. This article is posted here with their permission.

E-Book Royalty Math: The Big Tilt

To mark the one-year anniversary of the Great Blackout, Amazon's weeklong shut down of e-commerce for nearly all of Macmillan's titles, we’re sending out a series of alerts this week and next on the state of e-books, authorship, and publishing. The first installment (How Apple Saved Barnes & Noble. Probably) discussed the outcome, one year later, of that battle. Today, we look at the e-royalty debate, which has been simmering for a while, but is likely to soon heat up as the e-book market grows.

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 doesn’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.

In the meantime, what’s to be done? We’ll address that in our next installment in this series.

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.)

Takeaway Truth

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  1. I haven't seen any numbers that show the ratio of hardcover versus paperback sales for books with and without e-book versions.

    That is, are e-book sales hurting hardcover sales more or less than paperback sales?

    If the proportion of paperback copies sold is about the same as before Kindle, then comparing e-book royalties to hardcover is appropriate. If the proportion of hardcover sales is about the same, then a comparision should really be made to paperback royalties. Otherwise, one needs to argue that X e-book sales replaces Y hardback sales and Z paperback sales, and see how the royalties compare.

    Until file-sharing of e-books turns into a big problem, I suspect that e-books will be be a big plus for authors. The ability to download a book instantly will increase impulse sales. That is, someone will mention a book on TV, and Amazon will sell 3500 copies of it in the next 10 minutes.

    Write hard. Live free!

  2. Good evening, Harl.

    You know, I read all these reports from AG about this issue, and I pass them on because I think it's important to be informed.

    However, suspect they're talking about ebooks vs. hardcovers because most of the powers that be at the AG get published first in hardcover. That's not necessarily a bad thing, but that does give them a vested interest in the ebook vs. HC more so than ebook vs. paperback.

    I think the ebook is more of a threat to the HC because of price point difference. So, one could make the argument that the ebook royalty issue affects the upper strata of authors more than the struggling masses.

    This ebook royalty issue has little effect on the midlist authors who are trying to reach readers by pubbing their own ebooks. Most of this group aren't knocking back royalties from publishers for HC, PB, and ebook.

    I'm much more interested in these ebook sales than in the ebook sales that publishers have a vested interest in. In fact, I'm pubbing my first ebook in about a week.

    *g* Write hard. Live free!


  3. Amazon is promoting the concept of publishing fractional books. That's not their term; it's mine. If you have something that's far too short for a book, and far too long for a magazine article, the only thing you could do in the past was fluff it out to turn it into a book, and Amazon is suggesting you offer "natural length" Kindles at cheap prices instead.

    It sounds appealing to me. There are a number of topics I've considered writing a book about, but they really aren't substantive enough for a full book.

    What bothers me, though, is that publishers market books, not just print them. As time goes on, people will learn how to market these fractional books, and others will learn from them, but 1000 books of a local-interest book at $34.95 x 15% is a worthwhile $5200, and with physical books, you can sell them face-to-face. If you sell face-to-face with e-books, you very quickly end up with pirated copies eating your lunch, and users aren't sure how to books from a CD disk onto their Kindle, so you may have a much harder time selling e-books, even at $4.95, which would really clobber royalties.

    I take communion in the church of Samuel "No man but a blockhead ever wrote, except for money" Johnson, and I sure wish I was smarter than I am.

  4. Hey, Harl! I'm a member of the Johnsonian school of writing also.

    Indie authors/publishers are already publishing their "fractional books" and doing quite well with them. (As articulate as you are, I'm sure you could be one of these Indie author/publishers too.)

    I'm guessing you don't have a Kindle or similar ereader device nor are you hanging out at the Kindle or Nook Shop?

    Download Kindle for PC or Nook for PC or any other device. Check out some of the shorts that cater to a particular niche. Many are offered free and are worth less than that. Some are worth considerably more so readers are happy to buy them, usually at a price up to $2.99 (which btw, the author then gets a 70% royalty of that sales price).

    A $24.95 HC might earn 8% royalty for the author (who has already paid 15% to the agent), but the indie author can earn at least that. If the author got any kind of good advance, he won't see another dime until that advance is repaid. Therefore, he's got a high sell-through to achieve. If the author doesn't achieve the proper sales percentage, then, for most authors, the death spiral begins.

    For the first time, someone who has something to say and can say it well, can find an audience albeit small.

    However, those "small" sales for an Indie author can amount to as much as a traditionally published author can net. Plus, the ebook has a shelf life of forever, and the print published author has a shelf life of a few months at most.

    When one considers that a big publisher wouldn't ever publish something where the perceived audience is only a few thousand, it's easy to see that the author, especially the mid-list author struggling to make money on writing, has the advantage with ebooks.

    A lot of people are publishing things that a publisher would never touch: poems, short stories, reports, articles, essays. You name it, and if you believe that at least a few hundred people would be interested it in buying it, then you've got a way to publish and reach an audience.

    As to pirated eBooks, I haven't heard of anyone pirating an ebook Indie author. The pirates go after the bestselling print authors whose publishers put them out digitally too. And the pirates don't get the digital file to create their pirate edition. They usually scan the print book.

    Happy Sunday,

  5. I downloaded Kindle for PC about a month ago, and I've been greatly impressed. There doesn't seem to be much in the help file, though, and I haven't figured out what all the controls do yet.

    There are a lot of free books that are valuable. Most of the Gutenberg Project is free on Kindle, for instance.

    And having gone through the information on creating a Kindle book, some info escapes me, such as how to start a chapter on a new page, with the chapter number halfway down the page, and only about a quarter page of text. I realize that Kindle books are read on a variety of hardware, but there doesn't seem to be a "new page" tag.

    And if you wanted to create a long list, such as of dramatis personae, with characters on the left, dotted line, and actor on the right, I can't see how you do that in Kindle, except as a JPG. If you had a chart of 1000 products and their specific densities, that would run on for pages, but how many items do you put on a jpg when you don't know how it's going to be displayed?

    None of these are serious problems. On the other hand, if you were to organize a cookbook for your club as a fundraising project, publishing it on Kindle would make a lot better profit margins, but marketing it would be a bear.

    Like I said, someday, it'll all be figured out, but right now, I think there are a lot more questions than answers.

  6. Good morning, Harl. Sorry to be so late in getting back to you. The Kindle for PC is pretty simple, and, yes, there are a lot of free books. Lots of public domain books and also lots of books by well known authors offered for free as a hook to get you to like a new author.

    As to how to format a file for uploading to Kindle, I'd hoped to have posted this info on my other blog already. Frankly, I'm just kind of snowed under at the moment. It's always feast or famine in the writing game.

    As soon as I get the post written that will answer your questions, I'll let you know.

    I will tell you that if you want to publish something that has charts, graphs, or similar, it just won't show up well on Kindle. The reason is that the jpg can not be increased in viewing size to make the info easier to read. In fact, it's shrunk to accommodate the size parameters of the reading display so most charts etc. are practically impossible to discern.

    So if you're thinking about inserting a jpg representation of data, then think small: the smaller the amount of data you put in each jpg, the easier it will be to see it.

    Now, there's a book that I bought that is supposed to tell you all about graphics on the Kindle. Frankly, it hasn't been much use to me.

    Your cookbook example is interesting. It may surprise you but cookbooks are huge for ebook sales.

    You're thinking about marketing ebooks from inside the box of traditional book publishing and marketing. You need to step outside the box because it's simply not done traditionally.

    More on this later. Must run. However, I may copy all these comments and make a blog post about this because I think a lot of people might be interested.

    Have a good one!