Pass the Gestalt, Please

In the past two weeks I have heard forcefully stated pronouncements by agent Andrew Wylie and chair of the Society of Authors, Tom Holland, regarding ebook royalty rates.  A 50/50 share between author and publisher is the only possible outcome they can accept, citing the tired and somewhat old argument we have heard before:

The publisher has little or no incremental out of pocket cost to create ebooks, therefore the income should be split in the same manner as subsidiary rights, which is generally 50/50.

The average person would be hard pressed to disagree—certainly in this day and age the digital file created to make a print book cannot cost much to convert to an ebook. Even the DRM, hosting, and file management costs must be de minimis when compared to the cost of paper, printing, binding, warehouse, and shipping. And ebooks have no returns!

Ebooks aren’t a secondary or tertiary income stream for publishers like subsidiary rights; ebook income replaces hardcover and/or paperback income.

But there is a huge flaw in this view, as it is built on the self-serving and reductive assumption that ebooks can and should be viewed as separate from the book’s overall economy. By attacking ebook royalties in this manner, a trap is set by those seeking to maximize short-term profits at the expense of all else. The object of this ploy is to dissect the intellectual property into as many different pieces as possible and negotiate them on the open market in order to maximize the “deal.”

The problem with that approach is that successful and coherent publishing is not the sum of individual publishing rights, but rather the gestalt work presented coherently to a global audience. Viewing the ebook out of the context of the rest of the work gets us nowhere. We must understand how ebooks fit into the publishing ecosphere and only then can we determine what the right royalty should be.

To begin, let’s establish what an ebook isn’t—a subsidiary right.

Publishing contracts grant two kinds of rights to publishers—primary rights and subsidiary rights. Primary rights grant the publisher the right to create and sell a product, be it in print, audio, electronic, or any other form that the publisher invests and distributes directly to buyers, resellers, and/or agents.

Subsidiary rights, (aka subrights, rights, licensing) enable the publisher to license the work to a third party for the purpose of that party creating a new work—one that the publisher may not be equipped or desire to do. A good example of a classic subsidiary right is translations. Traditionally, the publisher shares the income it receives from this license 50/50 with the author, as the publisher does not bear the expense of creating and selling the translated work.

Looking at ebooks, publishers have clearly, universally, and without hesitation, put ebooks into the primary rights category. We all create ebooks and sell them directly and through resellers and agents. Any implication that ebooks are a subsidiary right is flat out wrong. Furthermore, we not only exercise a primary right in selling ebooks, we also make them available at the same time as the print books. This means that ebooks are competing with print books for readers . Ebooks aren’t a secondary or tertiary income stream for publishers like subsidiary rights; ebook income replaces hardcover and/or paperback income.

That’s right, ebook income replaces print income. So if the hardcover is out at $30 ($15 net after 50% reseller discount) and the ebook is available through an agency model at $15 ($10.50 net of agency 30% commission), the publisher is earning $4.50 less for every ebook purchased instead of the print book.

So how does that translate to author royalties? The author of a hardcover trade book is usually paid 10% – 12.5% of the suggested retail price—so on a hardcover sale the author of a $30 book will net $3.00 – $3.75. If one applied that same royalty to the ebook sold at $15, the author would receive $1.50 – $1.75.  However royalties for ebooks can range from 15% net receipts for front list, to up to 35% of net receipts for backlist. Therefore, a $15 agency model ebook will earn an author anywhere from $1.58 – $3.68.

Now think about the royalties paid for this work. The hardcover with its $30 suggested retail price earns the author $3.00 – $3.75 per copy sold.  If the publisher paid the same list royalties on the $15 ebook as it did for the $30 hardcover, the author would earn $1.50 – $1.75.  But authors are paid anywhere from $1.58 up to $3.68 on the $15 ebook, nearly as much as the $30 hardcover!

Publishers have seen a marked acceleration in the practice of disaggregating rights to works.

So anyone requesting a 50% share of net proceeds for ebook royalties is looking his or her publisher straight in the eye and saying, “I don’t care that a $15 ebook replaces that $30 hardcover. I don’t care that I was earning $3.68 on that $30 sale. I now want $5.25, full well knowing that it is $1.57 more than hardcover earnings!”

What kind of message is this sending to publishers? Is there a new willingness to explore new models and new ways of doing business? A new scheme that replaces high advances with high royalties? The answer is, of course, NO WAY! The advances on new books are as immutable as ever and one would be laughed out of contention for any book where such a trade-off is proposed. So what is going on here? How can such outrageous requests be made with a straight face? It all comes from a long established program of negotiations that I call “win at all cost.”

When one decides on a win at all cost negotiation strategy, one is looking only at the deal on the table and how to get the absolute most for oneself, and ostensibly one’s clients.  One of the most effective tactics in win at all cost negotiation is divide and conquer. Divide and conquer purposely disaggregates issues and boils them down to one issue at a time negotiations. Examples of this in publishing are when territorial rights are sold separately for English language books, when e-rights or translation rights are sold for additional advance income or, worse, withheld and sold elsewhere, etc. Publishers have seen a marked acceleration in the practice of disaggregating rights to works.

The net result of this practice is that no one can create anywhere near a coherent marketing and publicity program for trade books as no one knows who owns what. Furthermore, it is impossible to align efforts, as competing publishers often own different portions of rights to the same work. It’s the authors who suffer in the end.

Recently a colleague told me of a letter he received from an author bitterly complaining that the publisher in question had not been selling his book in the UK. The publisher responded, in a state of incredible frustration, that the author’s agent had withheld UK rights in order to try and extract an additional deal for the UK. This strategy backfired, no one bought the rights in the UK without corresponding US rights, and the author and the publisher were harmed in the process.

Divide and conquer is a very dangerous game as it tries to create the greatest short-term value for a work by selling off the sum of the individual rights. However, a book’s value is a very gestalt concept. The whole work has FAR greater value than the sum of the individual rights. Allowing each individual part, or right, to be disaggregated and auctioned to the highest bidder serves only those who make profit from short-term gain.

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36 Replies to “Pass the Gestalt, Please”

  1. It’s commendable that you want to save not only on paper, but also on the fuel it takes to ship physical books.

    The electronic version from M-H, NOT Amazon’s Kindle version, is identical in content to the printed version.

    On the other hand, I was brought up on physical books, I enjoy the tactile quality of them, it’s much faster to browse with a physical book, and you can’t accidentally delete them

    Cheers 🙂

  2. Very interesting POV, been studying this for a while, thru the lens of a working writer, hungry for more of the pie. But gestalting made me see it from a macrocosm, & I am rethinking the whole thing. Gracias, the Book Doctor

  3. This entire discussion, though interesting, is based on trying to wedge an existing model onto an out-moded one. The real change here is not the means by which books are delivered- it is the fact that publishers now have to market directly to readers, something they have never done well and are very uncomfortable with. We don’t buy books based on who published them- just as music labels are not the reason we choose artists. We buy either because we have heard good things or because the title contains information we need and, in both cases, that referral comes from social networks. If an author understands this, there is no reason why they need a traditional publisher. Instead they could compensate a social marketer with a revenue share.
    This entire conversation leaves out the costs of print, storage, delivery, returns and remaindering of print titles. Authors are compensated after these costs are factored in so they are not really getting the numbers you put out there. With a pure eBook strategy we need to rethink the relationship as a pure partnership between author and marketer (which is the only function of what used to be known as ‘publishers’). They pair up because the marketer believes the work is marketable and the author believes the marketer can promote their work.
    Look around you- everyone I know has bought a reader or an iPad in the last few months or plan to. Books are toast, an anachronism like vinyl albums. This is the truth that the publishing world doesn’t want to acknowledge.

  4. Cory I am just surmising from my own personal experience 🙂 I know three people with Kindles. My work colleague who has had his for six months and I know he has only read one book on it because last month he got an iPad and has already read about 8 books on it. My elderly neighbour who enjoys it but has only bought three books, one of which I organised for her. Lastly my own mother – my sister bought it for her and she hasn’t even turned it on yet…. LOL

    Not a scientific survey but imho demonstration that we can’t really surmise anything until we have some evidence.

  5. Can’t we deduce what kind of people they are, though? Why would you buy a technology made solely for reading unless you were a keen reader? And if you bought a book on it, why would you then also buy the printed version of that book? I have a Sony e-reader and would not buy an e-book and the same book in printed form, except in rare circumstances (if it won the Booker and I wanted a 1st edition, for example.) I’m curious to know what you base your own conjecture about this market on?

  6. Firstly we don’t have any idea what kind of people Kindle customers are or what their purchasing behaviour is. Secondly there is no evidence that eBook sales are cannibalising hard copy sales. What we do have is a lot of conjecture and lack of imagination among Publishers.

  7. Aren’t most Kindle users traditional heavy book buyers, including many women in their forties and fifties – ie not a new market at all? For them surely e-books are replacing print books. it seems disingenuous to argue otherwise. What can a specialist e-book publisher possibly do better than a conventional publisher in creating an e-book for reading on the Kindle? How many of the e-books Amazon sells for Kindle have any special features at all? For every copy of an enhanced ebook sold to a young early adopter for his iphone, there are thousands of books being sold by Amazon for a reading experience identical to that of a conventional book. The Rosetta vs Random House judgement was in 2001, pre-Kindle, a lifetime ago in e-book terms. The judgement stated: ‘ In development is the ability to incorporate within the ebook audio, graphics, full-motion video, and internet hyperlinks related to the electronic text.’ and ‘Rosetta’s ebooks can only be read after they are downloaded into a computer that contains either Microsoft Reader, Adobe Acrobat Reader, or Adobe Acrobat eBook Reader software.’ The court foresaw e-books as becoming more and more complex and multimedia. They did not foresee a reader that mimicked the experience of reading a printed book so directly, and that cannibalised sales so directly. Wouldn’t the judgement have been in Random House’s favour if they had?

  8. …and there we get to the crux of the issue: who has equity in the realization of profit potential? The publisher as risk taker, the author as the originator, or somewhere in between?

  9. The calculation of royalty that Evan uses is based on net sale price. Wouldn’t a better comparison of royalty rates be based on net profit if one wants to see how ‘fair’ a particular rate is? Using the same rate for both print and e-book would undoubtedly result in a smaller share of profits for the author, especially where the upfront development costs of the book have been fully amortized in a previous print edition. Is that fair to the author? The discussion of earnings is a bit of a red herring unless you also discuss the profit margins of each product as well.

    As the author’s Guild states in their letter today:
    “Knowledgeable authors and agents, however, are well aware that e-book royalty rates of 25% of net proceeds are exceedingly low and contrary to the long-standing practice of authors and publishers to, effectively, split evenly the net proceeds of book sales.”

    Not a simple issue, to be sure, especially when you factor in the variance of margins involved with front list vs. back list titles, the timing of release of e-book editions and the amortization of development expense, the agency model, etc.

    Evan Reply:

    If book publishing agreements were set up as profit-sharing arrangements – yes, this would be an equitable approach… but they are not.

    The publisher plays the role of the bank, R & D, promotions, distribution, warehousing (repository and platform development), and accounting. This arrangement has worked for some time as authors need guaranteed funding to be able to write books and publishers agree to the risk in order to be able to profit from that risk.

    Somewhere along the line the debate has taken for granted that this is not about equality – if it was, we would be talking about zero advances and profit-sharing schemes.

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