Let’s Talk eBook Royalties: First, What Should They Be?

By Neal Comment

We know publishing companies aren’t always having the easiest time transitioning themselves into the eBook market, but we can offer one bit of advice without hesitation: Don’t, as one independent publisher recently did, contact authors directly about your new electronic publishing program and mention in your email that “we’d like to make some changes to your publishing contract” to accommodate your new digital initiative and, by the way, here’s “an addendum to your contract that you will want to sign and return to me in order to enroll your title in this exciting new program.”

We say this because even though publishers may be able to tell authors, as this independent publisher did, that they anticipate being able to give them more money by raising the royalty rates on electronic media from direct sales, even with a reduction on the royalties on electronic media licensed to resellers, there’s generally (though not always) somebody else who needs to be in on that conversation: the agent. And when the agent finds out a publisher is sending contract addenda directly to authors and telling them “we will need you to agree to this minor contract revision before we can include your title in our e-publishing program,” we can assure you: The agent is not going to be happy. And she is going to let the publisher know.

As long as we’re here, let’s take a look at the two royalty adjustments in question, as described in the letter which at least two authors received from this publisher:

Model #1: Direct Sale of Electronic Media We anticipate the overwhelming majority of our electronic sales to be direct to consumers through our own website or indirect to consumers through e-book wholesalers and retailers. To supply this model, we will develop electronic editions of your book and make them available for download. Please note, your current contract allows us to distribute electronic editions.

While there are significant new costs associated with producing an electronic edition of your book, at least one enormous cost goes away in the process: we don’t have to pay for paper, printing, or binding. We want to share this cost reduction with you by increasing your royalty for all direct electronic sales of your book to 20 percent of net cash proceeds. This is an increase to your current royalty, and it has the potential to add significantly to the earning potential of your book over time.

Model #2: Licensing of Electronic Rights to Resellers Under your current contract, we have the right to license the contents of your book to third parties. We call this process the selling of subsidiary rights. Until now, we’ve used the subsidiary rights clause to sell your book in markets that we can’t easily access. For example, we do a rights sales when we arrange for your book to be translated and sold in a non-English speaking country. Your current contract stipulates that you receive a royalty of 50 percent of the net cash proceeds of subsidiary rights sales. This is a high royalty rate, but it is also fair and customary because subsidiary rights sales have traditionally brought in extra income without interfering with the direct sale of your book.

Some electronic retailers want to license the contents of your book rather than purchasing formatted electronic copies directly from us. Most notably among these is Amazon, which is licensing books to make them available in a proprietary format for its popular Kindle e-book-reading device. These sales also make use of the subsidiary rights clause in your contract. We think it’s important to participate in these licensing programs, but there are some drawbacks to doing so. Unlike traditional rights sales, which don’t include additional marketing and accounting expenses, these electronic rights sales come with many of the same costs as direct sales. To help defray these additional costs, we would like to adjust your royalty to 40 percent of net cash proceeds for subsidiary rights sales specifically to licensees engaged in electronic distribution. This is only a slight reduction from the rate that you currently enjoy, but our finance team has determined that it will be enough to make our participation in these programs viable in the long term.

Any agents want to weigh in on this argument? We’re undecided: It sounds good on paper, but only if sales of the publisher-produced eBooks really do outnumber the licensed versions produced by other entities. What happens if proprietary formats begin to dominate the market? And what happens if this publisher decides it isn’t really up to the task of developing electronic books in-house and decides to license the job out to another company? You may have other questions… tell us!