Nuthin’ but Net

One of the truly inspiring thing about ebooks is that they offer endless opportunity to iterate and morph selling and access models. Technology drives change and innovation, which in turn allows for all kinds of new and interesting features. All kinds of selling and access models are floating around out there, some that allow extension of purchase rights beyond a single user. There are models that offer no specific items to download and hold on any device, models that offer real-time content updates, models that offer print plus ebooks, ebooks plus TTS audio, subscriptions to ebooks, and on and on and on.

Innovation is not exactly something the book-publishing world is known for, so ebooks are a breath of fresh air – unless you are responsible for creating and maintaining systems to account for all these models.  Innovative models defy most publishers’ ability to effectively manage them, as publishing systems built for a stable, print-oriented world strain under the pressure of constant iterative change.

Net pricing ebooks would enable various vendors to create their own custom innovations and services for the same basic ebook, and then price it according to their needs.

Add to this strain the fact that in the US we must comply with the Robinson-Patman Act, which means that there are limitations on the manner in which we set up retail deals, no mater how experimental or innovative they may be. These rules, which govern discounting practices, may make perfect sense in the print world, but they are far less sensible when each vendor can offer unique qualities and access rules for the same title.

Publishers need to revolutionize the way we think about ebook revenue models in order for innovation and experimentation to foster access to book content for future generations of readers.

One way forward may be to overhaul the definition of ebook sales in author agreements and place it under subsidiary rights. Subsidiary rights allow third parties to create their own products based on content being licensed. Subsidiary rights deals are generally royalty based with an advance paid to secure the rights, much like how a publisher pays an author. Moving ebooks to subsidiary rights is very appealing on many levels, as it would allow individual vendors to create their own specific version of the ebook, price it as they feel appropriate, and pay an advance and royalty to the publisher for that right.

This would not only solve the different feature set problems for publishers, but also solve some of the cash flow problems that ebooks create. As I said in Why Ebooks Must Fail and Advances Must Align to Risks, ebooks are currently sold with no advance cash payments and have the same discounts as print, leaving publishers with the onus of huge advance costs and only a trickle of income from individual sales. This puts too much risk squarely on the publisher’s shoulders.

However, as intriguing as it would be to put ebooks into subsidiary rights (says the guy responsible for subsidiary rights at OUP), numerous problems would then exist. First, most vendors will not want to create and manage their own ISBN’s or tracking numbers, as already are far too many individual SKU’s to track today.  Furthermore, I can only imagine the reaction of retail ebook resellers when they are asked to pay advances on ebooks!

Yet these two problems pale in comparison to the impact this switch would have on publisher’s income statements and author shares. Subsidiary rights income is a separate line from sales on most publisher income statements, as it is a different kind of income stream from primary sales. Subsidiary income is paid to publishers as a net royalty and therefore is associated with the margin (profit), not top line sales. When a print book sale is calculated as the list price times net units shipped minus discount, subsidiary income is calculated by the actual payment received, period.  Most publishers go a step further and deduct the author share from the subsidiary income line. This means that the net royalty received minus the author share is what is reported on income statements.

Therefore, if ebook sales were to become a significant income stream and were treated as subsidiary income, top line sales, the traditional measurement of growth, would decrease. This is a non-starter for any commercially oriented business.

The final nail in the coffin comes from the author share issue. Most author contracts share 40-50%, even in some cases 75% of subsidiary income. While this is net income, it is still completely out of line with sales royalties of 5-12.5% of list price. Even at a 50% discount, 12.5% list royalties equate to 25% of net.  Publishers already have dangerously low operating margins; moving ebooks off the top line and sharing 15-30% more net income is a non-starter.

So where does that leave us? Vendors will be hard pressed to pay advances and manage their own unique tracking codes. Publishers require top line sales income and cannot pay out 25% in additional royalty.

I believe the solution lies in switching all ebook sales to net pricing.  Net pricing, as opposed to list pricing, offers a very different approach to sales. With net pricing, a producer offers a product to a reseller and asks for a set amount from each sale – or a net price. Rather than setting a suggested retail price or a list price coupled with a discount to resellers, Net Pricing establishes no list price but lets the reseller figure that out. For example, if a publisher decided it wanted to sell all ebooks at the same net price, say $10, that is what it would receive from each sale, regardless the reseller’s price.

Net pricing ebooks would enable various vendors to create their own custom innovations and services for the same basic ebook, and then price it according to their needs. The publisher would have no say in the price, and the margin that retailers fight tooth and nail to expand is completely at their discretion. Net pricing leads to both competitive pricing and to profitable pricing as there is no pre-printed price to work from.

This also enables the publisher to establish a set margin for the work, allowing various vendors to experiment with features and pricing without having to go back to the publisher for more margin or additional incentives such as coop funding. Net pricing would work in ebooks, as there is no inventory risk to manage. There is no chance being taken on “buying” too much product that is set at too high a net price, which will also allow publishers to increase or decrease the Net Price on the fly.  A whole new world of ebook pricing arbitrage awaits publishers with net pricing.

Publishers would pay authors off of this net price, which would dramatically simplify the royalty statements. No more figuring out discount, list prices, etc. No more wading through extra discount deals that have lower royalties and no more trying to figure out what the list price was at the time of the sale. Multiply net price times a royalty rate times the units sold and the royalty statement is complete.

Net Pricing for ebooks will unburden vendors and sales departments and allow for nearly endless innovations and models of access because there will be no set list price to reign in and stifle new ideas and new offerings. Furthermore, with net pricing, wholesalers can enter the market and not have to negotiate on two sides to earn a share of the margin. The publisher gets its net price; trading terms between the wholesaler and the retailer are of no consequence to the publisher.

For ebooks, a change to nuthin’ but net may enable a future that our current print-based system could never accommodate.

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3 Replies to “Nuthin’ but Net”

  1. still tryin’ to find a way to make your slice of the pie bigger, are you?

    good luck with that…

    because, yeah, amazon is gonna let you lower their discount, i’m quite sure of it, because they need you more than you need them, right? yeah, sure they do…


  2. I like the thinking here, but I will pick a couple of nits.

    1. Going to a licensing model does not necessarily require that an advance be paid on “royalties.” In fact, more and more publishers are trying to do “no advance” deals with authors so I think we’ll also see more “no advance” deals with rights. So whatever the problems with the rights paradigm in the retailer space, the requirement for an advance doesn’t have to be the thing which knocks it out.

    2. The problem with your “net pricing” idea, I think, is that it doesn’t account for the fact that, in the digital download world, eventually most publishers WILL sell direct to end users even if they didn’t in the past. And they will sell at some price, which will be, de facto, the publisher’s retail price. This is already happening, of course, and Amazon has apparently raised the point with some publishers that their “discount” is meant to be off the publisher’s price, and if the publisher is selling for less on their web site, their discount should be based on the lower price.

    That’s why I have advocated cutting the DISCOUNTS to intermediaries and have the publisher continue to sell at “full retail” (except for special promotional offers, bundles, etc) Seems like that would give us a cleaner playing field, if not a more level one.

    This is all still in the stage of getting more complicated, not simpler.

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