The publishing world is a vortex of change. There has been a steady flow of news reports, court filings by the Department of Justice, judicial decisions followed by settlements, merger announcements, controversial contract terms for new digital imprints and much more besides. We find publishers, brick and mortar bookstores, and distributors all trying to adjust their business models to respond to revolutionary changes in the production and distribution of literary material. All these changes have immense consequences for authors. It appears that the Kindle reader introduced in 2007 was as upsetting to the marketplace as the change from manuscript books to print books in the 15th century. Before Kindle, readers bought print on paper books; now paper and ebook sales are close to equal in fiction genres and gradually approaching equality in non-fiction.
When paper was King, there were two publishing models: traditional for the general reading public and vanity for the family. Splitting production and delivery has triggered a variety of new models. Just as movable type replaced the quill, electronic production is impinging on the market for print books. Traditional publishers pay a premium up front in the form of an advance against royalties for the right to publish and distribute an author’s work. Vanity publishing is essentially an arrangement in which authors pay for printing and other services. There are two models for ebooks: self-publishing for a fee is a vanity like model in which authors keep a significant portion of proceeds; or licensing to an epublisher such as Open Road or RosettaBooks for a royalty (but no advance) based on a percentage of net proceeds.
Traditional publishers have expanded their business models over the past few years. They are already publishing ebooks under the advance and royalties formula and they are also searching for new relationships with authors. We can see this with the recent introduction by Random House of the Hydra, Alibi, Loveswept and Flirt digital imprints. When Random House announced contract terms for these imprints there was an uproar. Science fiction and other authors and literary agents were horrified. This brouhaha was reported by Victoria Strauss in her Writer Beware Blog of March 7, 2013. She later reported on March 12 that “Based on strong criticism from writers’ groups, authors, and agents, Random House has decided to make major changes in its digital contract.” The Hydra Model is essentially a collaborative or partnership relationship in which the author agrees to license a literary work to a publisher for a share in the net proceeds from ebook sales. In the Hydra contract initially proposed there was no advance. After the response from authors and agents Random House posted a “Special Message” on March 12. The Hydra initiative has now been subdivided: there is a profit sharing model and a traditional advance and royalties model.
Two further points about changes in the publishing industry. First, in the Business Day section of Friday March 8, 2013, the New York Times reported that attempts are under way to create a marketplace for secondhand digital books. This is an extraordinary development. We all know about the market for print books; they are owned by the purchaser who can resell them. The “first sale” doctrine has been reaffirmed in the past week by the U.S. Supreme Court in Kirtsaeng v. John Wiley & Sons, Inc. At the present time electronic books are not owned because downloading is a license rather than a purchase in the traditional sense. Amazon and Apple have created algorithms for setting up an exchange for digital material. Amazon in fact received a patent for its algorithm in January of this year.
The second point concerns the domain name extension dot book. I’m quoting from a PW report of March 11: “In a filing with ICANN … the Association of American Publishers came out against a bid by Amazon to buy the .book domain name for its exclusive use, saying such an application would be counter to public interest.” To permit a company like Amazon to own a registrar for the dot book domain name would be equivalent to Citibank or Bank of America becoming the registrar for dot bank.
All this is playing out along with disputes between Barnes & Noble and Simon & Schuster about paying for shelf space (Report in the New York Times) and Amazon’s announced purchase of the social site Goodreads (from the same source). None of this suggests the demise of print publishing, but it disproportionately impacts authors whose works are less and less available in physical formats.
Whether money is the motive for writing – “[n]o man but a blockhead ever wrote, except for money” (Samuel Johnson) – or only one of the rewards for those lonely hours of composition, how does the author get paid? Before she reaches the “royalties” clause in her publishing contract she has to negotiate the “grant of rights”. What is she giving up for what she is getting? In exchange for granting rights that may extend beyond the grave, she earns royalties
Royalties were not an established convention in Samuel Johnson’s writing lifetime. What is the current practice? Royalties for trade books are typically based on list or catalog price, although some publishers pay on net receipts and net receipts are offered by traditional publishers for e-books. List price is better for the author. If royalties are based on net, it is crucial for the deducted expenses to be clearly defined. Thus, if the list price of a hardcover book is $36. and royalties (before escalations) are 10% the author’s account will be credited $3.60 per sale. Trade paperback and mass market paperbacks are similarly treated. It matters little to the author that the publisher discounts her books to a retailer because the discount does not affect royalties.
E-books are priced different. It makes a difference whether the publisher subscribes to the “agency” or “wholesale” model. This is so because under the agency model (which five of the big six publishers negotiated with Apple in 2010 and to which presently all six subscribe) the publisher rather than the distributor sets the price. The typical royalty provision for e-books reads “If published as an e-book edition, 25% of the net amount actually received from such sales.” If the distributor (Apple under the “agency” model) takes a “commission” of 30% the author will receive 25% of 70%. If the e-book price is fixed at $9.99 the publisher will credit the author’s account $1.75. (John Sargent, CEO of Macmillan in his letter to Staff following an unsuccessful meeting with Amazon on the “agency” model in January 2010, before Amazon acceded to it, stated that “[o]ur plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.”).
Independent e-book publishers subscribe to the “wholesale” model. A typical e-book contract may provide for
a royalty of fifty percent (50%) based upon Publisher’s Net Receipts for the first 2,500 units sold and sixty percent (60%) based upon Publisher’s Net Receipts thereafter. Net Receipts shall mean the amount actually received by the Publisher from the sale of the electronic editions of the Work, net of the following items: charges of third parties which sell the Work through websites or other distribution channels.
Assume an e-book has a list price of $9.99 and a discounted price of $4.99 and that the platform distributor (Amazon or Barnes & Noble) under the “wholesale” model) takes 30%, then publisher will credit author’s account $3.50 (at 50%) and $4.20 (at 60%). If the “agency” model survives an anticipated Justice Department lawsuit against the five publishers who crafted it, consumers will continue to lose on price and authors (at 25% of net) on royalties.
A reader has asked for some clarification on contract terms. Authors should not fixate on the myth of “standard” terms, but there are terms that publishers tare adamant about that may have to be adjusted to accommodate particular circumstances. One such term is the non-competition clause. It means what the publisher says it means when the term is dusted off and invoked. Here is a sample provision from a “big-6 ” publisher:
(a) The Author will not authorize or arrange for the publication, distribution or sale in the Exclusive Territory, otherwise than by the Publisher, of any work by the Author (or anyone who receives an author’s credit on the Work) that will directly compete with the work or diminish the value of any rights granted to the Publisher by this Agreement where such publication, distribution or sale will take place at any time during the term of this Agreement.
This provision has been in the news and is worth reflecting on. The New York Times reported recently that “Amazon Signs Up Authors, Writing Publishers Out of Deal” (David Streitfeld). This is what Mr. Streitfeld noted:
For a sense of how rattled publishers are by Amazon’s foray into their business, consider the case of Kiana Davenport, a Hawaiian writer whose career abruptly derailed last month.
In 2010 Ms. Davenport signed with Riverhead Books, a division of Penguin, for “The Chinese Soldier’s Daughter, a Civil War love story. She received a $20,000 advance for the book, which was supposed to come out next summer ”. Ms. Davenport picks up the story in her Blog of August 26, 2011:
Recently [the] publisher discovered I had self-published two of my story collections as electronic books…. The editor shouted at me repeatedly on the phone. I was accused of breaching my contract … [and] of blatantly betraying them with Amazon….
Upshot? Based on the non-compete provision, Riverhead terminated the contract and demanded return of the advance. The standard no-competition term contains no objective standards for measuring what is meant by “competitive.” For a publisher to assert that story collections would “diminish the value” of the Work is totally subjective, of course and perhaps unreasonable. There are several points of interest in the case if it were to proceed to a lawsuit.
One question is, Is it reasonable for the publisher to believe that short story collections would be competitive with a novel (after all, it could argued contra that the collections would enhance rather than diminish value by giving additional weight to the brand). The subjective element of the provision creates ambiguity. What standard is to be applied? If ambiguous, contracts are read against the draftsman and in favor of the other party. Further, if termination and demand for return of the advance were found to be out of pique with the author for having the gumption to package the collections with Amazon for self e-publication it would not sit well with the jury.
Terms are not set in stone, however. They can be negotiated, or if refused a business decision would then have to be made to go along or look elsewhere. Authors having published works they want to return to market should negotiate for the publisher’s approval.