Monday, December 21, 2009

It's Time for Publishers to PAY UP on eBooks!

Whenever I get a new intern, I take him or her down to the local Barnes & Noble and present a little primer on how the publishing industry works. They are always surprised. Heck, the last time I did it, we were interrupted by a store employee who overheard me talking about the business and told me she had just learned a lot.

First and foremost, you have to realize that the publishing business is a consignment business. Publishers provide books to bookstores, which sell what they can and then return what they can’t sell. There are very few bookstores that get stuck with books they can’t sell because most books sold to bookstores are sold on a returnable basis. Yes, that’s right, returnable.

The average bookstore gets a discount of about 50%. It may be a bit more or a bit less depending on promotions, volume orders, and the like, but 50% is a good average. So if a new book comes out priced at $25, the bookstore “pays” half that to the publisher. I put “pays” in quotes because the returns and credits game between bookstores and publishers is played with such gusto that the actual payment of cash by bookstores to publishers is likely far less often the case than you imagine, which is why publishers love shipping new titles like a Dan Brown or Harry Potter novel.

Ignoring the big chains, let’s consider how this might all work at an independent bookstore and imagine I own it.

In the average month, I might order several thousand dollars worth of new stock. The books come in, usually with the shipping paid by the publisher. I unpack the books and stock the shelves and wait for the books to sell. After a week, I notice that some books have not sold a single copy. I pull those books and set them in the back. I crack open the next week’s shipment and put out new stock. I watch to see what’s selling and find that of the new books, a few have not sold any copies in a week, while others have sold out.

I pull the copies that aren’t selling. The hardcovers get boxed up and the paperbacks get stripped. By “stripped,” I mean that I physically tear the covers off and throw away the actual books. If I’m dishonest, I might try and sell those stripped books for a quarter each to some guy who sells them for a dollar each on the street. If I’m honest and cautious, I tear the books in half and toss them in a couple of different cans to discourage dumpster divers from getting them. I ship the hardcovers and the stripped covers back to the publishers from which I ordered them and I receive credit. Yes, credit.

Have you ever charged something you purchased on your credit card and then returned it? The bill shows up with the charge, but not the credit. But you know you returned the item and the credit will be forthcoming, so you deduct it from the bill before you pay it. Bookstore owners do the same thing.

A bookstore may order $10,000 worth of books, but then return $5,000 worth of books or the covers of the stripped books a month later. With that credit, the owner may then order another $5,000 worth of books, or even $10,000, ratcheting up what he owes the publisher, but always knowing that he can return books for credit. He may let an invoice age sixty, ninety, or even 180 days before he sends in any actual cash on a single invoice, waiting to see how many of the books on that invoice actually sold and how many he returned.

But not with best-sellers. When a bookstore places an order for 500 copies of the new Dan Brown or Harry Potter novel, the publisher may turn around and say, “You’ve got $6,000 in unpaid invoices. You are on credit hold. Pay your bills and we’ll ship the books, or we’ll ship the books, but you will have to pre-pay or pay COD.” This changes the playing field pretty significantly. Bookstores want those best-selling titles and they will do what they need to to get them. In some cases, bookstores may return unopened cartons of other titles to build up as much credit for returns as possible. They want to avoid being told by the publisher that they can’t get those big titles without paying COD.

The returns that go back to the publisher will sometimes go back into stock, if they are full cartons. But mixed cartons go right into the “remainders” bin, to be sold off at pennies on the dollar. This is why you find hardcovers of books that have been out for just about a year on sale for $6.99. Or, in some cases, the publisher simply overprinted and had too much stock in the warehouse, so the extras were remaindered.

Returns and remainders aren’t completely bad. You want to have maximum sales and saturation of the marketplace with a title. If you fail to, then you lose sales. Publishers put some of their greatest efforts into cutting returns, but only to acceptable levels. A 35% return level on hardcovers is considered good. Fifty percent on paperbacks is average and if you do better (i.e., less than), then you’re in good shape.

Of course, now we have eBooks, which have no returns. eBooks don’t require you to print 100,000 copies to sell 65,000 copies. The savings could be huge and here we have a fundamental difference of opinion between publishers, authors, agents, and booksellers.

Ignoring the fact that brick-and-mortar bookstores are eventually doomed, since they will never be an outlet for eBooks, you get into the arguments over the costs of eBooks.

Let me be the first to say that until you get to the printing part, there is really no change in the cost of eBooks. You still have to pay an editor, copy-editor, typesetter, proofreader, publicity person, marketing person, and sales person. The “making” of the book is the same, right up to printing, which, of course, you no longer have. Assuming it costs $2.50 or so to print a hardcover book, the publisher saves $250,000 in paper, printing, and binding on a 100,000-copy printing. And no one outside of publishing houses thinks that it costs a publisher that much to deliver an eBook. Though I’ve yet to see a publisher offer up what it costs to create an eBook from start to finish, with no paper edition. And by “finish,” I mean a file that is ready to be sold via Amazon,, or off the publisher’s own site.

Next, keep in mind that most publishers offer “free freight,” meaning they pay to ship the printed books to bookstores. Without printed books, they save that cost. Plus the cost of the boxes to ship them in, plus the cost of the warehousing services to have books in stock to ship. Once upon a time, certain contracts factored freight into the royalty equation at fifty cents per book. If we use that figure on the 100,000-copy printing, that’s another $50,000 saved, for a total of $300,000. These are all my estimates, of course, and I welcome any publisher commenting on this with its own actual experience.

So what should happen with this massive savings, presuming the savings exists? Should publishers cut the price of books? Amazon certainly seems to think so, given that it is selling many eBooks for $9.99. Or should publishers share the savings with authors in the form of higher royalties? Agents and authors certainly seem to think so. Or should publishers increase their discounts to wholesalers, like Amazon and, so that those companies make more per copy? I’m confident I know the answer from those parties.

Publishers have been saying for years that paying royalties based on retail prices doesn’t work anymore, because retail outlets don’t sell books at those prices. Publishers want to pay on net and many have aggressively altered their royalty provisions for eBooks to a net formula. Agents and authors oppose this, because it means far, far less money to them than to publishers.

Okay, let’s twinkle think here for a minute (Yes, I watch a lot of SESAME STREET with my son). Publisher sells a $25.00 hardcover to bookstore for 50% off ($12.50 net). Author receiving retail royalties gets $2.50 in royalties on first 5,000 copies sold; $3.125 on the next 5,000 copies sold; and $3.75 on all copies sold thereafter.

Now, let’s say the publisher sells the same $25.00 eBook to Amazon and has a 25% of net royalty structure for eBooks. Amazon, I’m told, gets a sixty percent discount on eBooks. So that $25.00 eBook nets the publisher $10. The author gets twenty-five percent of net, which is $2.50. Wow! It’s the same number. Well, for the first 5,000 copies, after which it’s 62.5 cents less and ultimately $1.25 less. Where are the escalators on eBooks! Further, of the $10 the publisher receives, it no longer pays approximately $2.50 just in paper, printing, and binding. And since they save at least ten percent on production, giving up ten percent to Amazon in increased discount isn’t that big a deal, one might argue.

Don’t get me wrong. I’m all for eBooks and for a competitive marketplace, but publishers have to stop all of this bullshit about how expensive eBooks are to produce and maintain. Server storage space is dirt cheap compared to warehousing printed books. Every office that’s working to go paperless and get rid of the file cabinets knows this. Okay, paying a couple of IT guys to manage it may be more expensive than five warehouse guys, but you’ll more than make-up the difference by buying a few less forklifts.

Plus, as I mentioned above, WHERE ARE THE ESCALATORS?! I challenge any publisher to announce a change in eBook rates and policies that DOESN’T take money away from authors and actually starts to pass along some of the increased profits from eBooks. Start with adding escalators. No one is “going back to press” for another five thousand eBooks. The longer the book is in print, the greater the costs of producing that book are amortized over a larger number of books. This is true in printed books and it’s true in eBooks. An eBook that stays around a decent length of time will be costing the publisher pennies per unit sold to keep on its system. And the author will never participate in the extra profit on a system locked into 25% of net.

For legal reasons I’d don’t pretend to understand, agents’ organizations like the Association of Authors’ Representatives can’t get together and tell publishers to go to hell with these sweeping changes to rates. And publishers don’t care what individual agents say, even if those agents are at huge agencies representing dozens of authors. A publisher could change its entire royalty structure and make it a deal-breaker and agents would still submit. Because, like it or not, every single publisher is a monopoly. Sure, maybe not the way Microsoft is a monopoly or the way AT&T used to be one, but with all of the mergers and acquisitions and the adoption of “uniform” boilerplates across multiple imprints, they are monopolies just as well. It’s a shame the government doesn’t take note of this and take action, as it surely would if the AAR started telling publishers that its members will no longer be accepting 25% of net as an eBook royalty. It would be quite something to see the Justice Department tell Random House and Macmillan that they have to break up into a half-a-dozen competing houses again, wouldn’t it? And, I assure you, agents would love it. It would expand our marketplace to sell books and introduce new competition in the marketplace. And that’s what the American business world is all about, isn’t it?

So, what can authors do? Honestly, nothing. Except, maybe, self-publish. Certainly there are many authors with the means to do so, and, frankly, I wish more would. But I don’t mean paying iUniverse to publish your book. Imagine if Dan Brown just asked his editor to quit Doubleday and come to work for him, full-time, editing him and managing the publication of his books. Imagine if Tom Clancy did this, also. And many other best-selling authors. You don’t think that the accounts would place the orders? I do. In fact, I bet they’d place them non-returnable in exchange for a slightly higher discount. Let the bookstores remainder the books themselves. And let the author pocket the entire proceeds.

While this is likely more of a headache for printed books than even a best-selling, millionaire author wants to endure, it could be far, far less of one for eBooks. I bet Amazon would happily take a Microsoft Word file from any one of thousands of successful authors and handle the conversion to Kindle in-house and pay sixty percent of the price at which the book is sold to the author directly. And if eBooks are the future and this is possible, where does that leave publishers?

It’s time for publishers to stop reducing author participation in profits from eBooks and start INCREASING it, or the authors who can afford to do so will quickly start looking to do it themselves.



myletterstoemily said...

our young friends are all self-publishing for the very
reasons you outlined. the down side is that they also
have to self-publicize.

i am interested in writing a book for young mothers and currently am writing a blog for them, too.

do you have any suggestions?

Salaris said...

That's very interesting, I didn't realize that royalties for eBooks were locked in like that. I'm very curious about the production costs for eBooks and the maintenance required - I've never been able to find any statistics on the subject.

Thanks for the informative post.

-Andrew Rowe, West Hills, CA

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