Publishing Industry Myth (half-truth) #1

[Kali Yuga]

Originally Posted by Ralph Sir Edward

If she's make 8% royalty, then the publisher is making 92% (minus the lump sum advance to the author).

Correct. But the publisher is also absorbing almost all of the costs. Editing, cover art, proofreading (well, for the paper version at least ), marketing, not to mention the other distributed overhead. Apparently that can be anywhere from $10k to $20k or more. Her own estimate is that on that book, Penguin earned $250k in profit on $450k in revenue. (I'm guessing $50k for her advance, another $20k for editing/art/marketing etc, leaving $180k for taxes and other overhead.)

If the book wasn't a minor hit, the publisher is out of pocket -- and the author is not. 92% of the revenues of a loss is still a loss. And since most books don't hit the bestseller lists, it's likely that most books do not break even.

I.e. the publishers absorb numerous risks on behalf of the authors, and don't get obscenely wealthy in the process (see below).

Originally Posted by RSE

If this is such a razor-thin business, why aren't the companies located in Podunk, USA, where office space is 10th the cost of Manhattan/LA, and salaries/cost of living is lower? It's not like they have to have the authors come into the office every day....

Why are tech startups in Silicon Valley or San Francisco instead of Dearing, Kansas? Why would a painter or a photographer move to an expensive city like New York or LA, instead of Pine Bluff, Arkansas? Heck, why settle for a tiny US town? Maybe they should move their offices to Bangalore and use GoToMeeting non-stop.

New York, LA, London and so forth have the publishing infrastructure, the personnel, the networks, the agents, the media, the history. In the "can't win for losing" department , I'm sure if the publishers collectively fired 20,000 people and all moved to Kansas and disrupted the lives of a few thousand families in the process, the detractors would just proclaim this as yet another instance of the heartless and callous nature of the publishing houses....


Let's look at some actual numbers on margins. The best I can find on short notice is some PW articles:

http://www.publishersweekly.com/article/CA6589673.html
http://www.publishersweekly.com/article/CA448532.html

Education is in the 12-15% range; trade is 7-15% range. Harlequin, by the way, fell from an excellent 21% in 2002-2003 to 13% in 2007.

Now, I will admit trade does better than I expected, but it's hardly extortionate. Most of these publisher's revenues are 1/3 or less of Amazon's, B&N's or Apple's revenues. It's certainly not a "92% margin" that one might conclude based on royalty rates alone.

Or, to put it another way: The author gets a profit of 8-15% of sales, in the form of royalties. The publisher (their shareholders, to be precise) gets a profit of 8-15% for its work as well. So why does this qualify as unfair or exploitative profit...?

[Daithi]

Originally Posted by Kali Yuga

Hrm, RSE may have beat me to it. Anyway....



If you were basing your claim on actual numbers, you might qualify as a myth-buster. However...

Lynn Viehl (thank you to whoever linked her blog page to MR ), who has published several sci-fi books, posted her royalty statement and an analysis thereof online. She got a $50k advance, 8% royalties on paperback, sold around 65k copies. She earned $40k in royalties, $13k of which was held in case of returns.

Or to put it bluntly: she sold 65,000 books and hasn't earned her advance yet.

If she had a 16% royalty rate instead of 8%, she'd still need to sell around 40,000 copies to officially cover the $50k advance; assuming a 30% reserve against returns, she'd have to sell 65k hardcovers before getting an actual royalty check.

There is a separate issue of, "are writers selling enough to cover the publisher's expenditure of the advance." But the advance is not the only cost -- so it does not make sense to isolate just that cost and, on that basis, pass judgment on how much profit the system makes. I.e. when you ask "did the publisher make money on that book?" you must include all the costs of the book in that analysis. That's also going to have a complex answer, as the publishers have all kinds of overhead costs that are spread out over dozens of titles (e.g. office space, taxes, staff, legal).

It's pretty well understood that publishing has razor-thin margins. As informative as Ms Viehl's blog post is, it's only a part of the story.

Mrs. Viehl's royalty statement provides a perfect example.

Her publisher paid her a $50,000 advance and an 8% royalty.
Another publisher may have offered her only a $25,000 advance but at a 10% royalty.

She sold 65,000 books with a cover price of $8 ($520,000 total) and earned roughly $40k in royalties.
Had she taken the other publisher's deal she would have earned $65k in royalties, and long ago paid back the advance.

What was each publisher's cost in royalties?

The second publisher obviously paid 10%.
Mrs. Viehl's actual publisher paid 50k for 65,000 books ($520,000 total) or 9.6%.

So Mrs. Viehl hasn't earned back her advance, nevertheless, and this is the point, her publisher is better off even though she hasn't earned back the advance. Thus the claim that authors not earning back their advance is harming the publisher is a myth/half-truth. A publisher can have every single one of its authors fail to earn back their advances and still be making more than a publisher who has 100% of its authors earning back their advances.

The other costs of creating the book is just a redherring. It plays no roll whatsoever in advances and royalties. If it cost $2 to produce the book it wouldn't matter if a publisher offered the $50,000/8% or if they offered the $25,000/10% option. If it costs $3 to produce the book it doesn't change anything. Even if it cost the publishers $10 per book it wouldn't change anything -- the publisher would be broke but the logic is still sound.

[tompe]

Originally Posted by Kali Yuga

Or, to put it another way: The author gets a profit of 8-15% of sales, in the form of royalties. The publisher (their shareholders, to be precise) gets a profit of 8-15% for its work as well. So why does this qualify as unfair or exploitative profit...?

And to quote Charles Stross from a reason blog entry:

There's a lot more stuff going on behind the scenes. In particular, it looks like the industry-wide shift to the agency model, catalysed by Apple, has finally cracked open the door to a renegotiation of royalty rates payable by publishers to authors for ebooks. The traditional 10% royalty rate on hardcovers didn't come out of nowhere — it reflected a 50/50 split in the profits (the other 80% of the cover price going on production, printing, and distribution). With much lower printing and distribution costs, it looks like royalty rates of 25% or 30%, on a much lower overall price, may be where things are going under the new model.

[guyanonymous]

Sounds just like the world of music. Sure, you've made us $gazzilions, but we put out $alot and were paying you $alittle, and you've still not paid back the $alot. So we you owe us. We won't collect it, but we won't pay you until that $alot is paid back. Despite our $gazillions making that $alot insignificant in comparison.

[JoeD]

With much lower printing and distribution costs, it looks like royalty rates of 25% or 30%, on a much lower overall price, may be where things are going under the new model.

Arn't those costs "marginal", at least that's what posts in this forum and various authors/publishers blogs have claimed over the last week or so when discussing the Amazon issue

[Greg Anos]

Originally Posted by Kali Yuga

Correct. But the publisher is also absorbing almost all of the costs. Editing, cover art, proofreading (well, for the paper version at least ), marketing, not to mention the other distributed overhead. Apparently that can be anywhere from $10k to $20k or more. Her own estimate is that on that book, Penguin earned $250k in profit on $450k in revenue. (I'm guessing $50k for her advance, another $20k for editing/art/marketing etc, leaving $180k for taxes and other overhead.)

If the book wasn't a minor hit, the publisher is out of pocket -- and the author is not. 92% of the revenues of a loss is still a loss. And since most books don't hit the bestseller lists, it's likely that most books do not break even.

I.e. the publishers absorb numerous risks on behalf of the authors, and don't get obscenely wealthy in the process (see below).



Why are tech startups in Silicon Valley or San Francisco instead of Dearing, Kansas? Why would a painter or a photographer move to an expensive city like New York or LA, instead of Pine Bluff, Arkansas? Heck, why settle for a tiny US town? Maybe they should move their offices to Bangalore and use GoToMeeting non-stop.

New York, LA, London and so forth have the publishing infrastructure, the personnel, the networks, the agents, the media, the history. In the "can't win for losing" department , I'm sure if the publishers collectively fired 20,000 people and all moved to Kansas and disrupted the lives of a few thousand families in the process, the detractors would just proclaim this as yet another instance of the heartless and callous nature of the publishing houses....


Let's look at some actual numbers on margins. The best I can find on short notice is some PW articles:

http://www.publishersweekly.com/article/CA6589673.html
http://www.publishersweekly.com/article/CA448532.html

Education is in the 12-15% range; trade is 7-15% range. Harlequin, by the way, fell from an excellent 21% in 2002-2003 to 13% in 2007.

Now, I will admit trade does better than I expected, but it's hardly extortionate. Most of these publisher's revenues are 1/3 or less of Amazon's, B&N's or Apple's revenues. It's certainly not a "92% margin" that one might conclude based on royalty rates alone.

Or, to put it another way: The author gets a profit of 8-15% of sales, in the form of royalties. The publisher (their shareholders, to be precise) gets a profit of 8-15% for its work as well. So why does this qualify as unfair or exploitative profit...?

Hmmm. Nokia in Finland, Austin, Texas, the old telecom corridor near where I live, linux developers all over the world, e-book hardware developers in China... These folks matter too, and they aren't in the Silicon Valley...

That's why I mentioned the oil business. Much bigger capital investment, no guarantee of even a minor cash flow, and they paid better royalties, even in the their worst days, than the publishing industry.

The publishing business is economically incompetent. They are no more efficient than they were 50 years ago, in a world that is orders of magnitude more efficient doing everything else. Shucks, even Exxon moved their headquarters to Texas in the 1980's from New York, basically so their executives wouldn't have to pay all those New York taxes, and New york real estate prices, ect...

You can die a dinosaur or live as a mammal, the vultures don't care....

[Kali Yuga]

Originally Posted by Daithi

Her publisher paid her a $50,000 advance and an 8% royalty. Another publisher may have offered her only a $25,000 advance but at a 10% royalty.

Absolutely. But Ms Viehl and her agent may have told Publisher B to get bent.

Big advances are actually better in many ways for the author. Authors encourage it, if not request it, if not demand it. They get their money earlier; they don't have to wait months and months for the publisher to calculate and pay royalties; they don't have to pay back the remainder of the advance (afaik); and most importantly, the author gets bragging rights.

The publisher is a bit more out of pocket. But they seem to go for it because it helps them attract and retain talent.

I'm not saying this is the best system. I'm saying that:

• "7 out of 10 books don't recoup their advance" says nothing meaningful about a title's profitability, or a book's publisher's efficiency. (on this point I assume we agree)
• I have yet to see anyone cite that particular stat (or a variant) as an indication thereof.

So, not really sure who exactly you are trying to correct here....

[Kali Yuga]

Originally Posted by Ralph Sir Edward

Hmmm. Nokia in Finland, Austin, Texas....

*sigh*

I did not mean to say that the only valid place to conduct a tech business is in the Bay Area etc. It's more that even in the Internet era, there are certain (sometimes intangible) advantages to geographical concentration. For example, an acquisition editor who can meet a different agent for lunch every day of the week has a huge advantage in culling new talent and making deals over one who has to fly to 5 different cities for 5 different meetings.

Oh, and you can undoubtedly run an efficient business in a major metropolitan area, or an inefficient business in a less expensive region.

Originally Posted by RSE

The publishing business is economically incompetent.

So if they had 30% margins, they'd be exploitative fiends; if they have 10% margins, they're incompetent. Got it.

Originally Posted by RSE

They are no more efficient than they were 50 years ago, in a world that is orders of magnitude more efficient doing everything else.

Well, I don't have access to anything near the kind of numbers to genuinely compare publishing's efficiency now to its past, or to other businesses. But since they no longer use typewriters and rely exclusively on traditional presses, I'm going to guess that you're exaggerating. Just a little bit.

I can say this much, though:

• It's extremely difficult to be "efficient" in publishing (or almost any media business). With the exception of a handful of big hitters (King, Patterson, Rowling etc), there's no way to really determine what will sell, how much a specific author or title will sell.
• I'm not really sure that publishers would really be any better or preferable if they were as efficient as Walmart.
• A "more efficient" publishing industry would undoubtedly be harsher not just on internal staff (who already don't get paid much) and external suppliers, but on authors as well. (I.e. if you think authors currently get screwed, they'd be far worse off with a "more efficient" publishing model.)

Or to put it another way: there's more to a business than efficiency, especially when dealing with complex personalities and fickle audiences.

As to the "dinosaur" concept, I find this very odd. The publishers got extremely lucky, and had a potentially big and influential retailer (Apple) give them not just exactly what they wanted for the future, but also the leverage to demand the same terms from existing retailers.

Now it is entirely possible that publishers may price ebooks too high. But even so, the publishers are apparently forward-thinking enough to grab the opportunity to completely rework their pricing relationship to the retailers. Moments like these are exceedingly rare, and so far they seem to be making the most of it. They are taking a cut to their short-term profits in order to gain control and protect future profitability. That doesn't seem particularly "dinosaur-like" to me.

Further, while this may or may not apply to you personally, most of the people who refer to publishers as "dinosaurs" seem to want that entire layer to go up in a puff of smoke. So, I tend to view such comments with a touch of skepticism.

And let's face it, ebooks are the future, but over 95% of their revenues today are still coming from paper. They need to continue to make money in order to survive the transition. There isn't much point in focusing on the future, if it pushes you to take actions that ensure you won't survive long enough to see it....

[guyanonymous]

Wasting money on lunches, drinks, parties, schmoozing...no wonder the system is broken

Those lunches would be cheaper in Podunk, Nebraska too.

[Daithi]

Originally Posted by Kali Yuga

Absolutely. But Ms Viehl and her agent may have told Publisher B to get bent.

Big advances are actually better in many ways for the author. Authors encourage it, if not request it, if not demand it. They get their money earlier; they don't have to wait months and months for the publisher to calculate and pay royalties; they don't have to pay back the remainder of the advance (afaik); and most importantly, the author gets bragging rights.

The publisher is a bit more out of pocket. But they seem to go for it because it helps them attract and retain talent.

I'm not saying this is the best system. I'm saying that:

• "7 out of 10 books don't recoup their advance" says nothing meaningful about a title's profitability, or a book's publisher's efficiency. (on this point I assume we agree)
• I have yet to see anyone cite that particular stat (or a variant) as an indication thereof.

So, not really sure who exactly you are trying to correct here....

I'm not sure what to say here. Your initial post started out "If you were basing your claim on actual numbers, you might qualify as a myth-buster. However... " and from the tone, I thought you were disagreeing with my initial post. If that wasn't the case then I must have misunderstood you.

[DawnFalcon]

Originally Posted by Kali Yuga

Big advances are actually better in many ways for the author.

Complete myth. All that's doing is robbing peter to pay paul, you get less in the long run...and as I've said, I don't believe Publishers should be paying advances in the first place in many cases. Advances only work when there are significant - millions - of up-front costs, not small (tens of thousands) AND there is no venture capital in a market.

Given the very low risks involved for established authors, financing for very low rates is perfectly feasible.

[DD1509]

Originally Posted by Daithi

Myth (half-truth) #1: Most authors don't even earn back their advance.

This isn't exactly a myth, but it is a half-truth. The implication when the publishing industry, or one of the fanboys, make this claim is that the publishing industry is either losing money on that underperforming author, or that the authors making their advances are carrying the underperforming authors that failed to make back their advances. None of that is true!

Let's look at an example to see how things really work.

Publisher A offers a $50,000 advance and 8% royalties.
Publisher B offers a $25,000 advance and 10% royalties.

If the cover price is $28 then the author receives
__$2.24 from publisher A per book so he must sell 22,322 to earn his advance.
__$2.80 from publisher B per book so he must sell 17,858 to earn his advance.

Let's say the author sells 20,000 books. Does that mean publisher A lost money?

Absoulutely not. In fact, if his offer of a $50,000 advance allowed him to sign the author, then publisher A made money. It was publisher B who lost the author and didn't make money. In publisher A's case, he would have received $14 per book (50% of cover is an industry average) so he would have made $230,000 ($14 x 20,000 - $50,000). Another way of looking at it is that 20,000 books with a cover price of $28 were sold for a total of $560,000, and the author received $50,000 or 8.9%. While it is true that the author didn't earn back his advance, it is patently false that the publisher lost money on this book. In fact, publisher A would have made MORE money than publisher B, as they both would have sold 20,000 books but publisher B had to give the author 10% while publisher A only had to give the author 8.9%. Since top authors can get 12% (or more) we can assume the publisher isn't losing money at a 12% royalty. That means publisher A could give an author a $50,000 advance at 8% royalties and if the author only sold 14,880 copies the publisher would still be profitable, even though the author only earned back less than $35,000 of his advance.

Publishers can, and do, make money on authors that don't earn back their advances. It is true that blockbuster authors generate the lions share of a publishers revenue, and that is where publisher focus efforts, but this in no way invalidates the profits generated by midlist authors.

So when the publishing industry says, "Most authors don't even earn back their advance." Well, it is true, but the implication that the publisher is losing money, or that only a few authors are earning their advances and are carrying the other authors, is complete BS.

Net-net - any publisher who decides to embrace the electronic market place is likely making more money per book on electronic offerings than they ever did via hard or soft cover publishing...period. They are simply taking the advantage of a higher-profit medium and unfortunately mixing the higher-profit medium into their lower-profit medium.

Their fixed costs for electronic publishing are much lower than their costs for hard/soft over publishing. Don't let them kid you. But since their system is mostly based in the older, hard cover/soft cover world, they must still mix their high costs with the lower costs of electronic publishing. It equals a better product margin but it will not get increasingly better into they stop selling the lower margin hardcover books via their current costly distribution system.

For example, a publisher who sends a title to electronic publishing saves money in all of the following areas for every electronic version sold (of course not every book will be sold via this method). The question is which method really supports the other???

But let's assume the following for publishers who sell electronic copies:

No printing
No binding
No hard covers and no hard cover artwork
No distribution costs to other houses/re-sellers/no middle-men
No distribution of a lot of heavy products
No storage for a lot of heavy products

These items alone likely cost the publisher about 20-25% of their income on a given book, So when they decide to go electronic, they save approximately 20-25% immediately.

Of course, they will tell you that this is not true. Their hard cover efforts are what really sell a book. Their advertising, their promotion, their book-signing efforts, their advances and payments to the author and all of that.

Net-net - now that Steve Jobs changes the pricing schema, publishers can easily make more with electronic offerings. The bigger question is are they taking care of the authors in a similar manner?

[MrBlueSky]

Originally Posted by DD1509

Net-net - now that Steve Jobs changes the pricing schema, publishers can easily make more with electronic offerings. The bigger question is are they taking care of the authors in a similar manner?

No, the real question should be, are they taking care of their READERS in a similar manner?

Publishers may have a monopoly over how they price their product, but as a consumer, I have monopoly on whether I chose to purchase their particular offering or spend my money more wisely in other areas.

[tyche]

Just like movie and music, the publishing business is built on indenture and they will twist facts to keep themselves not only relevant but seen as the only way to the consumer. In some ways that's true after decades of creating infrastructure to make this self fulfilling prophecy. The Internet can change that radically.

What an author needs is an avenue to reach their readers. Assuming authors want to write and aren't business experts or want to deal with running their own store one of the ways is through major internet content distributors. Apple's App store and Amazon's new ebook offering both give 70% to the owner. There are other options as well.

Let's say you sell your book on Apple & Amazon for $5.99. Your return is $4. You sell 12,500 copies and you've made the 50k advance of olden days.

I don't think we're there quite yet but with millions of devices and growing yearly, it certainly has the ability to turn traditional publishing on its head. Unfortunately, a lot of this is in the authors hands and there will always be enough desperate enough to sign a contract for "guaranteed" money and throw their rights away.

[Seli]

Originally Posted by tyche

Just like movie and music, the publishing business is built on indenture and they will twist facts to keep themselves not only relevant but seen as the only way to the consumer. In some ways that's true after decades of creating infrastructure to make this self fulfilling prophecy. The Internet can change that radically.

Music at least is a different business from book-publishing. The core of music has always been performance, in a way recorded music is only tacked on. Books/stories were always meant to be copied and passed on.

...
Let's say you sell your book on Apple & Amazon for $5.99. Your return is $4. You sell 12,500 copies and you've made the 50k advance of olden days.
...

You now ignore 'cover design' (even an ebook needs a graphic to catch attention), editing and proofreading to start with, all of these would have to be paid by the author.
How many self-published authors do you know that sell 12.500 copies @ $2 let alone at $6?