Random House Resets eBook Royalties, Misses The Point

November 3rd, 2008 · 10 Comments
by Kassia Krozser

So, last week there were two big announcements in publishing. The first, of course, was the Google Book Search settlement, which received a huge amount of attention (a trend continuing to this week — it’s that big!). The second was an(other) announcement from Random House that they’re messing around with ebook and digital content royalties.

Let’s put this another way: the week that Google effectively sets the royalty to content owners at 60-something percent (there’s a bit of math involved, so, for today, I’m rounding), Random House decides that 25% of net amounts received by the publisher should be the going rate. Yep, that is a small disconnect you’re seeing there. Google, in conjunction with industry players, set the standard on the minimum e-royalty that other publishers will have to meet to remain competitive in the space.

Remember, the Google deal is quite author-centric, creating scenarios where authors, via the ASCAP/BMI-type structure, can be paid directly.

While Random House cites market conditions (those ephemeral things we know are out there but cannot necessarily see, touch, or quantify) and tries to hide behind the “in line with our competition” fig leaf, the truth of the matter is that “the competition” is not a handful of New York publishing entities. A few months back, I noted that author Terry Goodkind had followed the money and cut a deal with Rosetta Books, highlighting this quote:

When asked why Goodkind opted to be published in e-book by an independent, in Rosetta, Goodkind’s agent, Russell Galen, said Rosetta “offered us much better terms.” [Arthur] Klebanoff [CEO of RosettaBooks], who negotiated the Goodkind deal with Galen, added that he thinks the size of a publisher is also less important in e-book publishing. “Obviously Random House has a compelling argument when it comes to what it can do [in publishing] a phsycial book,” he told PW. “But in e-book [publishing] the people selling the books are Kindle, Sony Reader and various other e-tailers. So, whether the title is fed by Rosetta or Random House makes no difference.”

So a mere two months and change later, Random House counters this blow with….lower royalties? The problem, of course, that accepting this lesser amount doesn’t come with substantial incentives for authors — otherwise known as the “why?” question. Russell Galen notes that when it comes to e-book publishing, the distributor of the book makes no difference. Customers only care about fulfillment. They’re not peering down the food chain to see whose corporate banner is being flown.

It is incumbent upon publishers to understand the nature of competition. Most authors, yes, will take what they’re offered and be thankful that someone wants to publish them (this is a weird perversion of the business, but never mind that right now). It will be the authors with smart, forward-looking agents who withhold rights because there are better deals down the road. These will be the authors who understand that they need to define distribution terms to allow for maximum flexibility.

Publishing is in transition, and will likely be so for a long time. We’re in the wild experimentation phase of a new business model. Not everything will stick, not everything will work. Random House is not only on the same playing field as other publishers, but it’s also going up against new competitors: Google, Amazon, Barnes & Noble, a slew of independent epublishers, and even yet-to-be-discovered ventures that can change the game again.

Heck, Microsoft might get back in the game.

Count me among those who believe that setting royalty rates based on list prices is folly. Particularly in today’s world, where deep discounts are the norm. I appreciate the history of this convention, but find it archaic. I can hear a lot of authors screaming from here, but they know, deep down inside, that I’m right. It makes no sense to pay out royalties based on a number that has no true bearing on the actual financial transactions taking place.

In justifying this rate reduction, Random House cites the usual suspects and admits the truth:

3) The electronic formats are not as inexpensive to produce and publish as many believe […] We have made substantial investments, and we will continue to invest, in related digital infrastructure, such as the creation and maintenance of a digital archive, and in the development of the market for electronic formats…

Or, if you will, they’re asking that authors help subsidize overhead. Which would be neat, if oh, that wasn’t what the publisher should be doing with the amounts it already retains. RH goes on to say:

4) The new ebook rate continues to compare favorably to the rates we pay for other formats in which books are made available.

Yeah, well, those rates aren’t so hot either. For my money, anything less than 35% of amounts received is an insult (and I’m setting the rate lower than I honestly believe is fair, but, yeah, I do have a certain level of wimpiness when comes to the infrastructure argument). Publishers don’t “own” books, they license rights to a particular book. Publishing entities that get this will survive and succeed (and there will be quite a few).

Publishing entities that don’t will go softly into the good night.

File Under: Non-Traditional Publishing

10 responses so far ↓

  • Kat J Meyer // Nov 3, 2008 at 3:25 pm

    Awesome post, Kassia. Right now authors have a window of opportunity to either negotiate for more equitable royalties, or shop around for the best distributor for their digital (and even print) rights. If a publisher is really doing right by the author – providing great editorial/production, marketing and sales support, then if they have a better chance of retaining authors. However, as that is decreasingly the case, publishers are going to have to give a better royalty if they want to keep authors from going elsewhere or out on their own.

  • Richard Nash // Nov 3, 2008 at 3:31 pm

    I do have some sympathy for the infrastructure argument too, I’ll confess. I think we need to go with fairly short licenses, say 3-5 years, with the publisher allowed to match a competing offer to retain rights, and renewing say every 2 years. I also think that escalators will make sense, especially as electronic revenue becomes a bigger component of the first years of the life of the book. Remember that companies who are publishing electronic editions of existing texts are likely benefiting from the plant cost (developmental editing, copyediting and proof reading, audience development [such as all these are])—if one is starting from scratch, there will be need to claw back margin. Not that either of us can negotiate on behalf of all agents and all publishers respectively, but I’d like to suggest 30% of net, up through advance earnout, 35% thereafter, for a 3 year license, renewal for 2 year periods with the publisher required to match offers. (This latter concept could become a little complicated for publishers like me, where I am in fact providing value to the consumer beyond simply making the book available.)

    Oh and key point made about licensing. Might I reiterate the point of a screed on my blog from a while ago (http://www.softskull.com/news/2008/06/publishing_terminology_problem.html) — publishers do not “buy” books from agents, we “license” them from authors “via” an agent. We should start to insist on these terms, methinks…

  • Kassia Krozser // Nov 3, 2008 at 7:22 pm

    Kat wins super-extra credit points for saying what I tried to say with clarity. Thank you. Nobody will ever accuse me of pithiness.

    Richard — agreed on terminology. I think if we start changing language, then we’ll be better positioned to talk about the future. I agree with your points about epublishers (those who work with existing editions versus those who are e from the get) benefiting from the work of others. I had a friend express some surprise (yes, a friend of mine who should know better ) about the overhead issue. It’s real and needs to be considered.

    I’m not so sure about starting at 30% (when I posited 35%, I was surprised by the level of pushback suggesting I was too low), but will twist that around in my brain. 25% just feels insulting to me on so many levels.

  • Mark // Nov 4, 2008 at 12:49 am

    Hmm. This post — and the responses — really got me wondering.

    I am half-skeptical of the infrastructure argument because I don’t think the infrastructure is really worth it. Random House needs to trim some of the fat out of their operation before they start trimming royalties. And we know that digital revs won’t replace current revenue 1 for 1. It is diet time and it is obscene of them to pass the buck.

    On the other hand I have been expecting the traditional publishing house to split in two. The in-house talent that is truly scarce is going to migrate up the chain (towards the author) while becoming more valuable and more expensive. The other activities become commoditized. There is downward price pressure and the house breaks up. The bottom half — production and distribution — go to an Ingram/Amazon entity. The top half starts to look like United Artists or maybe CAA. And lets face it an author can be their own epublisher these days. I can easily see their agent/manager doing that for them.

    Then I remember, United Artists didn’t do so well.

    I like the idea of changing the language and I like the idea of shortening the terms. Changing the language would help clarify that the publisher is no longer in charge — the author is. Things are now inverted. And thinking in 3-5 year terms supports the supremacy of the author. Is the marketing/publicity plan fresh after that long? H. no.

    It would make publishers have to hustle to keep top talent. I think that would be good for everyone.

  • Richard Nash // Nov 4, 2008 at 9:15 am

    This is some great stuff. Damn. I’m agreed with Mark on a couple of levels, and also share Kassia’s uncertainty about where to put the number—I think we’re all feeling our way forward a little…

    OK, so, a few more thoughts. Agreed, publishers will need to give back points to the author, but damn, retailers can’t justify 50% of list price, right? Right now, retailers are NOT giving back any points to publishers, despite only offering server space and screen time, and that hurts our ability to give points back to the authors.

    Next down the supply chain. Yes, Mark, the vertically integrated publisher should start to fade away. The indie-press + distributor model could also be instructive here—standalone boutique-scaled editorial and marketing/publicity units with sales/warehousing/credit&collections/freight all under the distributor banner. The distributor though is also not giving up many points yet…I’m sensing they’re trying to take about 18% of net, as opposed to 25% of net for print.

    So basically, we’re not getting any help with terms down the supply chain, and, at the same time, the print book players down the supply chain are shoving ever greater amount of inventory risk onto the publishers. On average the two main wholesalers have halved their buys which for a press the size of Soft Skull means an loss of 20% in our working capital—for larger publishers who depend less on wholesalers, maybe more like 5%. So figuring out eBook royalties is occurring in a specific context, which will change, but we don’t know when exactly. And we could face disruptions as well as incremental change, like for example, retailer bankruptcies in the face of dropping demand for pbooks, such losses which we’d need to absorb.

    The other thing is that once e-revenue starts to match or exceed p-revenue, we should be in a situation where A. a failed book is less of a failure, because we’re not writing off inventory, and each book successful book doesn’t have to pay off as much from a failed book; B. the e-revenue is being expected to cover more of the company’s overall overhead. Does A. match B.? Hard to know yet. So I guess I’m advocating that we don’t quite push the royalties too far out, and let’s see the rhythm of change. In the 3-year short-run the $$ involved will not be huge—I guess if I’m advocating 30%, it definitely should be only for 3 years, and should bump upon advance earnout (odds are once the advance has earned out, publishers’ other sunk costs have also been covered…)

    One thing I should add: I just heard the most outlandish position from Wylie on eBook royalties, one of which includes the stipulation that the eBook not be sold at a lower price than the existing print edition. So let it be said, sometimes agents can be dumber than publishers.

  • Royalties: Less Pomp Better Circumstances | INDEX // mb // Nov 4, 2008 at 11:19 am

    […] on the topic at ereads.com. Kassia Krozser submitted her thoughts on the royalty announcement on her Booksquare blog. Now Soft Skull’s Richard Nash is making me reconsider everything in his comments to […]

  • Kassia Krozser // Nov 4, 2008 at 11:33 am

    In a different mindspace this morning, so (hopefully) deeper, more intelligent thoughts later. However, love the Wylie comment. Clearly *someone* isn’t out here in the real world, buying books.

    I can agree that a slow push forward is smart. Not only is this market still developing, it will likely look very different in a few years.

    Circling back to the infrastructure argument, despite my stated weakness, there is still an unsavory taste in my mouth when it comes to asking authors to put out for building this necessary functionality. We’ve agreed (I believe) that publishers license certain rights. Part of my mindset — this is the emotional BS, not the rational BS — thinks that a key selling point for signing with publisher A versus B is that publisher A has the necessary infrastructure to manage the best possible distribution and exploitation of a book. The Random House position is a bit more of, “Hey, write the book, let us distribute, oh, can you help us build our systems to manage that distribution, and, oops, we’re gonna give you only 25% of we actually receive for all of this.”

    More to come.

  • Martyn Daniels // Nov 5, 2008 at 12:05 pm

    From my blog
    When we lease a commercial property we enter into and contract and that contract recognises more than anything else, that life changes over time. So we have a lease term and we have lease reviews and importantly we can also have break clauses. This form of review ensures that both parties remain focused but removes much of the risk that could be experience as market and businesses change.

    Today the majority of publishing contracts are one offs that in principle are appended to but in the main are negotiated once and thereafter remain for life.
    Today we are now one short step from books never being out of print and the erosion of the rights reversal opportunity that has underpinned many rights contracts. Some publishers have long wanted this perpetual tethering of the work, others have respected the contracts and the spirit into which they were entered. Irrespective, some would say that Google has, with some help, now effectively ‘driven its juggernaut’ through rights reversals and orphan works and even managed to redefine ‘fair use’, if only for themselves.

    It is interesting to gauge the reaction of various parties in the post Google settlement, but it is clear that it will be ‘sanctioned first and maybe questioned later.’

    So what of authors’ rights contracts moving forward? Will they, or can they, be now term based? Will, or can, a work be subject to rights reversal, or is it a case of ‘one shot only’. Is there any sense now to territorial rights and how will the likes of Google ever enforce these? If a book is published by one publisher in the US and another in the UK, who do Google respect and pay?

    Next we have the great urban myth: That the electronic formats are not as inexpensive to produce and publish as many believe.

    Hello! The real reason behind this is that publishers are still, in the main, running their editorial and production processes in analogue. If they were digital their ability to produce digital, physical, or whatever, would be a lot cheaper. Many are still digitising physical product, or at best ‘finished typeset product’. Publishing isn’t digital, it merely distributing and selling digital product.

    So should authors’ sign up to deals based on an inefficient and transient process and will poor royalty rates be revisited once the publishing process becomes efficient?

  • Speakeasy » Blog Archive » The Perils of Being an Author in a Digital Age // Nov 5, 2008 at 11:04 pm

    […] on the list price, they will base them on the actual net moneys they have received as publisher. Booksquare goes into this really well. Their reasoning for why they are doing this? – “With the […]

  • ebookroyalties // Feb 21, 2010 at 11:54 am

    I would like to thank Kassia for a nice article, with many interesting details. I think your general sentiment (“Random House goes the wrong way, as seen from the authors’ perspective”) is correct. But I just don’t see how that would generate the second part of the title of this post, namely “Misses the Point”.

    What I am driving at is this. While the title implies that Random House has made some kind of faulty conclusion, possibly based on some rational error or some incomplete assessment of the situation at hand, the article, what I can see, does not explain how that may be.

    What the article does not do is to explain what “the point” is, and in what way Random Houses “misses” it. Of course, we may say that your perspective seems to be that “the point” is that authors should be properly compensated for their writing, and that Random House does not succeed in doing that; thus, they “miss” the point. But isn’t a little too easy?

    I mean this: Random House’s interests, what I can understand, is not primarily to serve the authors. Rather, it is to serve itself, as a business.

    So the idea to NOT give authors more royalties but instead less, is of course, from THEIR perspective not in any way, shape, or form, a “missing” of any points; instead, that IS the very point itself: to make more money.

    Thus, I think the title was a little misleading. However, I liked the different arguments you brought forward, so it was still a nice read.

    Bo, Editor,