Dear Reader, I knew that one day events would transpire in such a way that my poor dear husband (a scientist, a professor, a lover of numbers that make sense) would find the travails of living with a writer too much and he would break under the strain. That day is today, after 32 years of (relative) forbearance. The specific events which have broken him are this writer’s foolish propensity for handing him her iPad and saying, “Read this blog, these numbers don’t make sense, do they?”
With a guilty heart, I hereby allow him to rant, in public, about the subject of ebook royalties. I promise henceforth, never to hand him my iPad (on second thought, I don’t promise that…it would be detrimental to my understanding of all publishing things having to do with numbers, not words). Rant on, honey…
When your WW (Wonderful Wife) is an author you spend a lot of time talking about books and publishing. When the WW is number challenged and the industry is going through a paradigm shift you spend a lot of time talking about royalty rates, profits and fairness.
In order to defend my point of view (and the family fortune) I started reading her blogs and industry news, as well as attending a Ninc conference or two as a tagalong spouse. First thought: a lot of people who should know better don’t. These people are countered by the wonderful blogs of Konrath, Goldberg and others who can do math.
While reading another nonsensical blog from an unnamed source I started looking around and found a statement from the Authors Guild against the 25% of net on books. The key piece of this press release was the model that a 15% royalty rate on hardbacks was fair, with fair being defined as a 50-50 split between the author and the publisher. I could do something with this idea and I set out to determine what a fair Ebook royalty rate should be. I then found Lee Goldberg’s 2/3/11 blog which ran through the numbers of the 25% royalty rate. It is very good and I suggest you read it. I’ll wait…
…While Lee showed the 25% rate to be unfair he did not tackle the question of what a fair rate should be. Thanks for leaving me something, Lee!
In what follows I lay out the philosophy (a 50-50 split between author and publisher as achieved in hardback sales), and my assumptions to determine a fair Ebook royalty rate . If you don’t want to read through and argue over my assumptions here are my conclusions: Ebook royalties should be between 31.4%and 45% of net. The lower royalty rate assumes publishers have the same cost to publish an ebook as a paperback while the 45% has a more reasonable cost.
Wholesale Discount: The discount the publisher receives; if the publisher sells the book to a wholesaler for 60% OFF the cover price put 60% in this cell for a net to the publisher of 40%.
If, and this is a big if, the publisher and author truly do split the profits equally on a hardback at 15% royalty we can calculate all the publisher costs (total of sunk costs + cost to print, distribute, sell, and return of books). An even split requires that a publisher’s other costs are accounted for by assigning a cost of $4 per book. This could be the direct cost associated with a book or could include all operating expenses. The Authors Guild did not make clear the intent of the model.
Pub Costs: Calculation of costs associated with producing a physical book, in order to have an even split is $4 which matches Lee Goldberg’s estimate ( 2/3/11 blog). So all looks good.
E book model: (agency) 50% net royalty
1. In the agency model the publisher sells the book to Amazon for 70% of list, but controls the list price. In exchange the list price is substantially less than the list price for a hardback.
2. The third column is my estimate of the Agency discount rate used to determine the Kindle selling price as set by the publisher. An exhaustive search of two bestsellers showed discounts between 46 and 54 %, hence my choice of 50%
3. With an even split a 50% of net royalty rate is equivalent to a 35% of list.Note that while the author is a bit better off under this 50% royalty making $3.5 instead of $3, the publisher’s net (cash flow) is much worse off, making $3.50 per book instead of $7. The publisher’s profit, if they have no costs, has improved (Assuming no costs to publish is of course unrealistic).
Conclusion: a 50% royalty may disadvantage a publisher.
Let’s look next at a Publisher Model. In this section I pretend I am a publisher and will argue with myself:
Pub: You naïve authors. Even if I don’t have to print, transport, store, and accept returns of paper I still need to keep the lights on, pay for office space and people’s 401Ks. There are real expenses associated with a book.
Author: I can self publish a book for under 1K, including editing, cover design and other stuff. Does it cost you more?
Pub: Darn right it does. (mumbles to self) I wonder what crazy number they’ll believe? (aloud) Our cost structure is proprietary, revealing it would put us at a competitive disadvantage and violate the Sherman Anti-trust Act.
Author: But how can I tell what’s fair?
Pub: Trust us. A 25% of net is fair and better than you lot deserve.
Let’s look at the numbers and see if 25% of net is indeed fair.
As others have pointed out, if the publisher has no cost, the 25% net royalty rate gives them a much larger profit and significantly less for the author.The Publisher may claim that it costs them $2.25 per book to publish an Ebook, in which case they make the same as a hardback while the author does worse. If a Publisher claims they are splitting the profit 50-50, this means their cost is $3.50 per book, almost the same as the hardback costs. This is not believable.
Conclusion: 25% net is much too low a royalty rate, a 50% net is too much as it assumes no cost to the publisher and is not realistic.
*The fair royalty rate*
With these constraints (more than 25%, less than 50%) let’s calculate a fair royalty rate or at least narrow the range a bit.
To estimate this figure we need to pull more figures out of the air. Feel free to put in your own.I assume that the publisher wants to make back their costs with sales of 10K books and their cost to produce a book is 2K (twice the cost of hiring someone to do it for you). Therefore they need to recoup this cost in 10K books. Abracadabra, they need to earn 20 cents per book. To be extremely conservative let’s say 50 cents per book. The important take away is to note that this number, under any reasonable assumption, is pretty small.
In this case a fair royalty rate for ebooks is 46.43%
My conclusion: If a publisher’s costs can adequately be accounted for at 50 cents per book or less, they are better off ebook publishing than hardback publishing. This conclusion is based on the $4.00 truly representing the cost of doing business in the traditional model. If this cost is less, the ebook deal will cost them money.
Now to attack my numbers. The above discussion has focused on hardbacks. Most books sold are paperbacks. Let’s repeat the analysis and see what is fair in the world of paperback publishing.
The discount for Kindle edition for paperbacks is not as significant as for hardbacks, a quick search showed a range from no discount to a buck off, with a few deep discounts of 99 cents for an $8 paperback. I will assume an $8 list price paperback and $1 discount for Kindle. Amazon still says the price is set by the publisher so I will stick with the Agency model for the split. I assume an 8% author royalty rate for paperbacks.
Since paperbacks are often pulped and not returned and are cheaper to make Iestimated (pulled out of the air) the cost to make, distribute and sell a paperback at $2. With this cost structure the publisher’s profits are over twice the authors. The pub costs could increase up to $3.36 to have a 50% split. For the sake are argument let’s take the numbers as I give them in the table above.Now consider Epub under the agency model.
In this case, still assuming a 50 cent per book cost as above, a 45% royalty rate is fair and results in an equal split of proceeds after costs, between the publisher and the author. While the publisher makes less than they would with hardback rates they make a lot more than a paperback.
A publisher might still argue that I drastically underestimate the costs of doing business and it costs much more to publish an ebook than 50 cents.We can assume that it costs the same to make an Ebook and a paperback and see how that changes things. In this case the publisher needs to make (net – author royalty) the same as they made for paperbacks, in this case $3.36. In order to accomplish this goal they can pay a royalty rate of 31.4% of net. An author makes $1.54 vs 64 cents while the publisher, after paying royalty, makes $3.36. If the publisher’s cost are less than $1.82, they make more than off paperback sales, and more than the author.
Conclusion: Ebook royalty rates should be between 31.4% (if cost of ebooks and paper are the same-unlikely) and 45%, leaning significantly towards the higher rate.
The 45% rate assumes a reasonable cost to the publisher and should be a net win for both publishers and authors.
It is interesting to see what happens if the goal was to keep the publishing profit the same for ebook as for paperback ($1.36 in my example) by lowering the cost of the book. In this case, lowering the selling price by 40% (to $4.85) at a 45% royalty gives the author $1.52 and the publisher a net of $1.86 ($1.36 profit at 50 cents cost per book). If both the publisher and author kept the same profit for an ebook as they earn for a paperback the price of the $8 paperback would be driven down by 55% to $3.57 selling price for an Eversion, very competitive with indie ebooks.