*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.

Fascinating conclusion, but I suspect what’s missing on the publisher’s side is the admission that books, much like movies and video games, operate on a “blockbuster model.” That is to say, most books lose money on their face and are subsidized by the radical success of widespread, mainstream uber-popular properties. Publishers want to protect their excess margins not strictly as a matter of per unit profit maximalization (though that’s part of it), but because when the next harry Potter or Twilight comes along, they need to ski as much off as possible to keep the system going.

>>Author: I can self publish a book for under 1K, including editing, cover design and other stuff. Does it cost you more?<<

The author asks the wrong question here. The author should be asking how going with this publisher will earn the author more.

Great work, Kelly’s hubby. I’d love to take credit for the figures in my 2-3-11 blog, but they came from the Authors Guild.

Lee

If the goal is a 50-50 split of the net profits then the “Author % of net” should always be 50%. The column you call “Pub Net” should be called “Pub Gross” then subtract “Pub Costs” to get “Pub Net”. Your method will result in the split varying with the amount received by the publishers. For example, using your 45% fair ebook model with $4 gross being paid to the publisher results in $1.80 for the author and $1.70 for the publisher, but $10 gross to the publisher gives the author $4.50 and the publisher $5. The publisher gets a better percentage as the price of the book goes up because the cost is a smaller percent of the gross.

I have no idea whether any of your assumptions are correct or even close, but even if the cost to produce an ebook is 2K, the cost per book depends on how many books sell. As you point out it will take sales of10k books for the publisher to recoup costs at 20 cents/book or 4k books at 50 cents per book, but neither of those numbers is the cost per book until that many books are sold. Publishers might think it’s only fair that no royalties be paid until the costs are recouped. That is the situation that anyone who pays $1000 to someone to produce a book for them will be in.

Dear Damned,

But the author”s Guild idea has the publisher/author splitting the profits, not net, equally. You are of course correct that the cost to put up one book wouldn’t be 50 cents, it is the amortized amount over some expected sales.The publisher takes the risk but reaps the rewards once the upfront costs are paid off. We can look at print runs and sell throughs to get a reasonable, and conservative, figure. I imagine these kinds of thoughts go into the advance and marketing (spending) decisions. I assume the publishers can do this fairly well.

You are very correct that the profit split depends on the selling price but as the costs approach zero, my 50 cents per book or less, they approach a constant and argue for the 50/50 of net split you start with. Since ebook prices for whatever people call ebook hardbacks seem to have converged around 10 to 12 bucks my numbers work as a guide.

The next question is, “Are the publishers really an equal partner?” If not then the model should be changed with the authors getting substantially more. One can figure out the present vs future value of the advance, risk of not earning out (with better royalty rates there is a much better chance to earn out), etc to model this and come up with some figures.

Dear Jay,

I expect publishing does follow the 80/20 rule with most profits coming from a few books. If the profits of the hits are shared fairly (50/50) then a higher royalty for ebooks would not change anything. Except, I expect, the massive scale of hits results in lower per unit costs so the publishers do receive extra profits from these books. Since ebook costs are so much lower there is not as much room to profit from scale.

I’d be surprised if most books really lose money. Even if they don’t earn out the publisher can make a nice profit. Might even turn out that the midlisters are the primary workhorses turning out the cash flow.

Any disgruntled publishers out there who want to spill the beans?

Jim,

Let me start by pointing out where I goofed up. It wouldn’t take 4k in ebook sales to recoup 2k worth of costs unless each ebook sold only returns $0.50 to the publisher which seems unlikely. Though it doesn’t seem clear even to me at this point, I think what I wanted to get to is the idea of fairness. I think both publishers and authors could argue that it’s fair for them to get a bigger split, and depending on how it is figured I think it could be argued that the 50/50 split proposed by this blog is unfair to successful authors. If the proceeds after costs includes the cost of a flop then it allows publishers to spread the losses from their non-sellers to books that do sell. That’s why a 50/50 fairness argument confuses me. When someone says 50/50 split it implies to me that the author should get 50% after the costs of their book are recouped, but the numbers being used seem to be averages that include losses on non-selling books. Is it 50% on an individual book, or 50% after the publisher recoups his losses on non-sellers?

I know the Author’s Guild examples using 25% royalties did subtract what they called the “encryption fee” after figuring the royalties, but since they don’t explain why that cost should be treated differently from other costs, it makes more sense to me to subtract it before figuring royalties. This seems in line with the blog goal of getting “an equal split of proceeds after costs”. But whether you subtract the Pub Costs before or after determining royalties, 45% is incorrect. It achieves an equal split in the example, but will not produce an equal split if the book price is more or less than $7.

Kelly, thank your Dear Husband from me for this outstanding analysis. I shall have to read it several times before it all sinks in. Being a non-numbers person, too, I find it far easier to hand digital work to my husband.

I hope you don’t mind, but I put up a blog post on my blog (http://twwblog.com), pointing people here to read.

Thank you!

McKenna, my husband thanks you. He loves it when he can talk numbers.

Wait… you say:

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%.

and then you put 50% in the wholesale discount column for hardcovers. Which one is right?

I was hoping there would be a .pdf version of this available???

I wanna hold on to this analysis for now and certainly for later when the world comes banging down my door for my literary brilliance. (not!)

Or, maybe a print-friendly version – I can turn that into a pdf quickly.

PS – thanks to McKenna for linking me over here!

Hi Neil,

My original plan was to give the spreadsheet and I wanted to explain what each cell meant so people could play with different scenarios. From what I think I know the usual wholesale is 50% but places like Walmart probably get a better deal.

If I didn’t make I note I’d have to check the formula to determine if a 60% discount required a 60% in this cell or a 40%. With 50% it didn’t matter.

Hi Hobie,

I’ll send Kelly a pdf and see if she can send it to you or post. We are on the road with poor internet at the moment…

Hi Damned,

The 50/50 slit seemed to be the long standing understanding although I saw it provided by a 15% of list for hardbacks not 25%. The write-up I saw was unclear if all costs (lights , office space as well as direct costs of making and selling books) were recouped or if only direct costs. If 15% of list provided a 50/50 split (on a 20 buck book) then this allows the publisher to have $4 of costs associated with the book and still earn the same as the author.(Sorry, on the Ipad I can’t see your comments and what I write at the same time so I may run onto a tangent)

Again taking the Authors Guild 15% as a starting point there is no issue with making up for losses of other books. Each book is treated on ts own. I expect the big publishers have very Few real losers as it doesn’t take much to earn back their costs

Superstars are often their own category with their own rules, the Stephen Kings and JK’s can make their own rules.

Dar Damned (continued)

I hit the post by mistake! The goal of my analysis was to be equal to what happens in hardbacks. With a $20 HB the author makes 3 and the pub,after paying royalties which I call Pub-Auth, has $7 Since these aren’t equal the costs must be $4.

Other models can be used but the two I see are royalty as % of list or % of net. It would be a bad deal to allow the publisher to subtract costs, undefined, before calculating payments. I think this happens with movies that, although widely profitable, some how never earn enough to pay royalties because costs of every loser is thrown in.

Someday I’ll look at the SEC filings of the publishers and see if I can figure anything out. Surprised teh writers groups haven’t doen this in publicized and explain the results.

BAck to your last point, as the cost per ebook falls the 50/50 split becomes insensitive to the book price. Since the publisher does not reveal the cost per book to the author or agent and teh pub usually keeps the right to price the book it means the author has to see how a particular royalty rate works for them.

Hope that helps. If I missed a point or misunderstood let me know.

Jim

Hi Debbi,

You are misunderstanding and misrepresenting my analysis. You should re-read the section where I look at the Implication of ebooks coating the same to make as paperbacks. I did this so I can bracket possible royalty rates. The result, even with this extreme cost, is that royalty rates should exceed 25%.

Jim

What everybody fails to take into account print-wise, however, is the royalty-free money the publishers make that most authors don’t know about, and are far too trusting to consider. When a publisher does an initial print run of, let’s say, 50,000 copies. They request an overrun of an additional 50,000 copies, but only let the author know about the official print run. For every five copies a book sells, the publishing company claims sales for 3 of those books out of the overrun, and only declares a sale of 2 books, 2 books for which they have to pay royalties to the author. The 3 books are sold royalty free, thus earning the publishing company a higher profit. If the books sells 50,000 copies in all, the author is under the impression that they only sold 20,000, because 30,000 copies have been sold from the overrun. This is why many mid-list authors never earn out their advance. Sneaky, I know, but it is done. This is another reason they try to justify a lower rate to the authors on e-books.