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Old 02-02-2010, 11:07 AM   #1
Daithi
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Authors get screwed by Agent Model

I took a look at the numbers, comparing the retailer model with the new agent model that Macmillan Publishing is championing. It really screws the authors.

Under the "Retailer Model"
$28.00 typical list price of a new hardcover
$14.00 publishers net (Macmillan has stated that Amazon pays them 50% of list)
$2.80 authors royalty (Macmillan has stated it pays authors 20% of net)

Under the "Agent Model"
$14.99 list price
$10.49 publisher net (Macmillan gets 70% and Amazon gets 30%)
$2.10 authors royalty (Macmillan still pays authors 20% of net)

Clearly the publisher is making less money under this new model. The author is making less money under this new model. The only one making more money is Amazon, and the customer is getting hit with a 50% increase in price.

Looking at the figures I really wonder if other publishers will adopt the agent model. Additionally, Macmillan under pays its authors, and the other big publishers pay their authors 25% of net. That means that these authors would take an even bigger hit if their publishers adopted the agent model (25% of $10.49 is a lot less then 25% of $14.00). Most (or at least a lot) of the independent publishers pay their authors based on list price, typically about 10%. This model REALLY hurts those authors -- 10% of $28 is $2.80 and 10% of $14.99 is $1.50.

Amazingly the Association of Authors’ Representatives (AAR) has came out in support of Macmillian. Although I think this has more to do with seeing a publisher stand up to Amazon, and little to do with how it will affect their authors' bottomline. The Authors Guild has also came out in support of Macmillan, although they too didn't note that authors will make less under the agent model.

I think Amazon is making a huge mistake for which they are starting to pay for now. The publishing industry knows the money they are making on ebooks right now is an illusion. They are making money because Amazon is willing to take a loss on ebook sales. The publishers know that this model is unsubstainable and no business likes uncertainty. The publishers need some assurances from Amazon that in the future the publisher's and author's profits won't take a big hit as more and more people adopt ebooks.

Amazon needs to provide the publishers with a model that works for all involved -- including consumers. I don't know what that model ultimately will be, but it will probably start with getting a handle on the true cost of an ebook, which is roughly the cost of a hardcover minus the cost of printing, distribution, warehousing, and retailer returns. I suspect that initially an ebook should probably cost more than $9.99 but less than $14.99. As time goes by, the cost of the ebook would go down just as it becomes economically feasible to release a hardcover in a mass paperback format.

Last edited by Daithi; 02-02-2010 at 11:31 AM.
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Old 02-02-2010, 12:05 PM   #2
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I'm not sure your figures are correct. My understanding is that royalties are based off of the cover price, not whatever discount the retailer sells at (though afaik that depends on the specific wording of the contract).

More importantly, I suspect the reality is far more complicated, and difficult to predict without access to far more information.

For example, royalty rates aren't static; they alter depending on the type of book sold (e.g. 25% hardcover, 20% trade paper, 15% mass market), and also with the number of copies sold. Royalties also kick in after the advance is recouped, which doesn't happen for a lot of books. Further, in the short term the agency model is in part about ensuring that ebooks don't eviscerate hardcover sales, which will also influence the eventual royalty rates.

And while so far it seems that Amazon has the wherewithal to lose money on ebook sales, especially while sales numbers are relatively low, that won't last forever. The theory is they will eventually try to force publishers to slash wholesale prices. In which case, one possible scenario is:

Current
$25.00 cover price
$12.00 wholesale price
$10.00 reseller's price
$5 royalty

Future, Same System
$15 cover price
$7.50 wholesale price
$10.00 reseller's price
$3 royalty

Agency Pricing
$15 cover and reseller price
$10.50 publisher's cut
$4.50 retailer's cut
$3 royalty

Again, this is still over-simplified, and there are numerous other factors that are too complicated to evaluate without in-depth information on continuing paper/hardcover sales, overall sales figures, contracts and other contingencies. So the actual effect on author's incomes is extremely difficult to evaluate.


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Originally Posted by Daithi View Post
Looking at the figures I really wonder if other publishers will adopt the agent model.
The other 5 major publishers already have, with Apple. It's possible they are already pushing retailers towards the agency model, though they may wait to see how the Apple deal works out first.


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Originally Posted by Daithi
I think Amazon is making a huge mistake for which they are starting to pay for now.
That was quick.

I don't think anyone knows for sure what will happen. It's possible Amazon may be able to hold onto their current agreements, undercut Apple on price, and still generate enough revenues that the publishers accept the new price point. The $10 price point may already be established, so consumers may react negatively to a $15 price point on new books (even if the price drops after 3-6 months). Amazon may look for more subtle ways to "punish" Macmillan. Other publishers could delay non-agency ebooks. Apple could do a good business even with a premium price.

No one knows which model will work best, but this is the time to experiment, while the ebook market is still small.
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Old 02-02-2010, 12:07 PM   #3
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I'm sure the authors will let us know which system screws them more.
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Old 02-02-2010, 01:16 PM   #4
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I think in many places you and I agree Kali Yuga. I'll also grant you that unless we could examine actual contracts and sales figures that we can't know anything for sure. However, there is quite a bit of information available for us to reach some general conclusions, and if the figures I provided in my original post are correct the authors are taking the short end of the stick in this deal.

BTW, the figures I used came from a NYTimes blog article in which a Macmillan represenative said, "Amazon could continue to buy e-books under its current wholesale model, paying the publisher 50 percent of the hardcover list price...". The 20% royalty figure on ebooks came from a Publishers Weekly article that quoted Sargent as announcing that "Macmillan would be instituting a boilerplate contract across its divisions that would offer a 20% royalty on net proceeds on e-books, a drop from what has become the de facto industry standard of 25%."

I was wondering on what you are basing your figures. In the examples you provided you used royalties of 20% of the cover price (what I called list price). I've never heard of an author getting that much. When paid a royalty on cover/list price I've seen figures in the 8% to 12.5% range depending on volume. You also included wholesale prices, but it is my understanding that the big 6 publishers all deal directly with Amazon.

The point I think we can agree on is that Amazon must do something to insure publishers that ebooks won't harm their business. You also made a good point about the $10 price point being established.

If you look at the price at which Amazon is currently selling hardcovers you will see they are normally selling for around $15. Let's say that printing, distribution, warehousing, and reseller returns comprises $3.50 of that cost (I think this figure is low and it is probably closer to $5, but for the sake of argument). This means an ebook "sold" at $11.50 would give the publishers and retailers the same profits they receive on hardcovers. If Amazon had a system in place that insured the publishers that the publisher wouldn't lose money in the future then they might not be so reluctant to see Amazon losing money to establish the ebook market.

Last edited by Daithi; 02-02-2010 at 01:18 PM.
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Old 02-02-2010, 01:56 PM   #5
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Quote:
Originally Posted by Daithi View Post
...if the figures I provided in my original post are correct the authors are taking the short end of the stick in this deal.
That's a given in any deal.

Quote:
If you look at the price at which Amazon is currently selling hardcovers you will see they are normally selling for around $15. Let's say that printing, distribution, warehousing, and reseller returns comprises $3.50 of that cost (I think this figure is low and it is probably closer to $5, but for the sake of argument).
Per Lynn Abbey: "When my first book came out in 1980, a 40% sell-through was considered a success (that is, six out of every ten books in a print run, never sold….maybe never made it to a bookstore). Five years ago, my editor (at Tor, btw) said they were trying to make peace (and profit) with the idea of a 20% sell-through."

Two things here: first, Tor is an imprint of Macmillan. Second, my impression is that those figures are overall, including both paperbacks and hardcovers.
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Old 02-02-2010, 03:03 PM   #6
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I'm just going off of my understanding of how wholesale prices and royalty calculations are typically set.

But let's accept your assumptions. In a revised reseller model with lower cover prices, in order for Amazon to make any profit the wholesale price on a brand-new release would need to be under $10:

$8 cover/wholesale price
$10 Amazon's price
$1.60 royalty rate (20% of the wholesale price / Macmillan's net)

In this scenario, it's unclear if Macmillan can still earn a profit, as the cover / wholesale price would need to be cut by nearly 65% in order for Amazon to just break even. I'm pretty sure that would wind up having an effect on royalties.

Overall though, I still think no one really knows the full effects of these changes, and unfortunately experimentation is likely in order. That's my story and I'm sticking to it.
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Old 02-02-2010, 03:18 PM   #7
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Pardoz, I'm not exactly sure where you were going with your post, so if I get the point wrong, my apologies. I took a look at the Lynn Abbey article to which you linked. Her position was that printed books had a substantial cost that was quite a bit higher than publishers were willing to admit. She was claiming that for every 5 books printed only 1 was sold (the 20% sell through). This means that the printing, distribution, warehousing, and pulping costs of all those extra books need to be added into the actual cost of printing the 1 book that does sell. I believe the industry standard for retailer returns is actually in the 30% range (not Lynn's 80% figure), but her point (and by inference yours) is that these retailer returns are a huge part of why printed books have a higher cost than ebooks. I agree completely, and this is largely why I thought the extra cost of paperbooks was closer to $5 than $3.50.
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Old 02-02-2010, 03:18 PM   #8
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I agree that what's really behind the disagreement is not whether authors make more or less money with the different model. Because publishers don't believe the current Amazon model (where Amazon pays more in royalties than they collect in customer price) is sustainable, they fear they're being pushed into a situation where Amazon has bought a monopoly and comes to collect. They'd rather take less now and encourage competition than take a bit more now and find Amazon alone in the world.

I certainly understand their fears (and as a small publisher, I too hope that we'll have competition in the distribution of eBooks). As a consumer, however, I'm concerned about producers being able to insist on a set price for their product and making it impossible for retailers/distributors to offer discounts.

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Old 02-02-2010, 04:05 PM   #9
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Great topic, Daithi. Here's some more fuel for the fire.

Here's two posts about how much Lynn Viehl, an author with a book on the New York Times mass market bestseller list, has made off her bestseller, Twilight Fall.

http://www.genreality.net/the-realit...mes-bestseller

http://www.genreality.net/more-on-th...mes-bestseller

Long story short, her net profit after a year was about $25,000, with 89,142 total sales. And the publisher’s portion of sales on the book was around $453,840. She estimates about $250k net.

And it's not like this was her first novel or anything. It's the sixth in the series, and debuted on the Times mass market list at #19.

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Old 02-02-2010, 05:07 PM   #10
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Quote:
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Long story short, her net profit after a year was about $25,000, with 89,142 total sales. And the publisher’s portion of sales on the book was around $453,840. She estimates about $250k net.
Yep, she also got a $50k advance for that book.

Keep in mind, 90k in sales is a home run for most publishers / authors. Most titles don't break even, and publishing has terrible margins. So the publisher may generate $450k in revenues from her, and I'm sure they are happy with her performance (even if it didn't hit the advance), but they aren't making $250k in profits off of every author out there.

Plus, there's the open question of what kind of sales she would make if she didn't have a publisher. E.g. let's say she sold ebooks directly via Amazon DTP at $7.50 each. With the new arrangement (announced last week), she gets 70%, Amazon gets 30%, and prices need to be $10 or less. She'd still have to sell 10k copies to equal the $50k advance. Add in the cost for a freelance editor ($3k?), cover art ($2k?), and marketing, and she'd need to sell 15,000 copies.

That's doable -- for an established author with a good reputation, a following, good business savvy, and interest in doing all the work typically handled by publishers and agents and the like. AFAIK, no one has gone from zero to 20k in sales as an unknown self-published author. It could happen one day, but IMO that's a long ways off.

But I agree with her general point, that it is very tough for a writer to earn a living (except for the mega-sellers). Always has been, always will be -- no matter what starry-eyed Internet prophets tell you about a possible world without intermediaries....
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Old 02-02-2010, 05:11 PM   #11
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I'm sure the authors will let us know which system screws them more.
I bet we don't hear one word from an author signed to one of the major publishers on this. Not one.
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Old 02-02-2010, 05:11 PM   #12
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Yep, she also got a $50k advance for that book.

Keep in mind, 90k in sales is a home run for most publishers / authors. Most titles don't break even, and publishing has terrible margins. So the publisher may generate $450k in revenues from her, and I'm sure they are happy with her performance (even if it didn't hit the advance), but they aren't making $250k in profits off of every author out there.

Plus, there's the open question of what kind of sales she would make if she didn't have a publisher. E.g. let's say she sold ebooks directly via Amazon DTP at $7.50 each. With the new arrangement (announced last week), she gets 70%, Amazon gets 30%, and prices need to be $10 or less. She'd still have to sell 10k copies to equal the $50k advance. Add in the cost for a freelance editor ($3k?), cover art ($2k?), and marketing, and she'd need to sell 15,000 copies.

That's doable -- for an established author with a good reputation, a following, good business savvy, and interest in doing all the work typically handled by publishers and agents and the like. AFAIK, no one has gone from zero to 20k in sales as an unknown self-published author. It could happen one day, but IMO that's a long ways off.

But I agree with her general point, that it is very tough for a writer to earn a living (except for the mega-sellers). Always has been, always will be -- no matter what starry-eyed Internet prophets tell you about a possible world without intermediaries....
That is the one question about authors going straight to Amazon, and bypassing publishers..would Amazon pay advances to allow the writer to eat while they are writing?
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Old 02-02-2010, 05:14 PM   #13
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Why would they need to? If you're an author with a record, then there are other ways to get financing. Indeed, strangely enough there are a lot of industries where future work is used to provide funding for living costs during projects.

Sure, it makes it hard to go full time. But that's hard right now.
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Old 02-02-2010, 06:00 PM   #14
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The advantage with the Amazon system is that Authors should get a monthly check from Amazon. So as soon as its posted with Amazon they should have a monthly income. While they are working on their next book.

Only the very top notch authors get a big enough advance to actually live on for 2 years while they write the next book.
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Old 02-02-2010, 06:20 PM   #15
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I'm sure the authors will let us know which system screws them more.
The answer is...I'm not sure.

Book contracts vary in how they share ebook earnings with the author. Macmillan's split is reportedly 20-25% of net receipts, yet my ebook royalties with Tor (a Macmillan company) are set just like hardcover royalties, at 10-15% of suggested retail cover price.

With the old system at Amazon, I don't even know what that means. We don't know what the suggested retail price is; maybe it's the hardcover price, maybe it isn't. We just know what Amazon charges.

With the agency model, we'll know that figure. My suspicion is that the net to the author will be less. But it's complicated, because we don't know how overall sales will be affected, including the possible loss (or gain!) of hardcover sales, and we don't know the affect of adding a new, potentially major bookstore to the picture.

There's another factor, too, that's almost impossible to quantify. Publishing is an industry that's struggling. The ability of publishers to take risks on new authors and midlist authors depends in large part on their making higher profits on the bestsellers. So, if you look at benefits to authors as a class (and the reading public that wants diversity, not just bestsellers), there's something to be said for publishers making higher profits.

The Authors Guild and Richard Curtis (literary agent and publisher of E-reads) have both said they expect the author share of ebook net to go up, under pressure from agents. We'll see. E-reads right now pays 50% of net to authors, double what the Big Six pay.
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