E-book royalties

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The Australian Society of Authors has released some advice to authors about what royalties they should expect from e-books. I thought the advice would be about how to think about these issues in negotiating over royalties but at times it seems to go further. For instance, in trying to explain why e-books sell for less than physical books, the report says:

This reduction in price has occurred because of the clout and market power of the online sellers: a few big players have effectively locked up the major (obviously not all) sales channels already and can more or less dictate terms. If cheap e-books become a more substantial part of a print publisher’s business in the future, revenues and profits are not likely to be what they have been used to, which is not good news for authors.

Really? How about the fact that you don’t have to print, ship and store the books? No mention of that.

It then goes on to say that it is pretty well impossible for authors to get a royalty on e-books per unit the same as they get on physical books. There are some toy calculations but, in reality, it makes little sense. It also does not take into account the idea that demand curve slope downwards. So if e-books can sell at a lower price, you will sell more units of them. What matters to the author is total sales rather than dollars per unit.

There is then a discussion of how the ‘agency’ model of Apple (where publishers set book prices while Apple receives a 30% fee) is better than the ‘distribution’ model of Amazon (where publishers set a wholesale price while Amazon sets the retail price). Of course, with these platforms competing, that makes no sense as they should result in the same outcomes for authors. Also, they do not note that the ‘distribution’ model is the current one for physical bookstores — something they previously had said they loved.

The report then gets very specific in its advice:

For locally authored print books also selling as e-books, between US$10 and $20 online (or their equivalents in Australian dollars), the ASA recommends that authors should aim for a minimum royalty return to the author of 35% of 100% of every 60/40 (ie publisher/retailer) split of the list price OR, any equivalent mix of percentages that will achieve at least or better than the same dollar return as the print book version at standard trade discount in conventional bookshops.

So they are saying that publishers need to cede more royalties to Apple? It is currently 30% and they want to move to 40%. Alternatively, they are arguing to try and get as much out of selling the e-book as physical books which makes some sense. Anyhow, I’d be worried about ‘price signalling’ except that it isn’t quite clear that they are signalling for higher prices (although parts of the document claim that they are).

Much of the report is helpful advice but there is also lots that it is misleading, distracting and probably wrong. In my experience, what authors need is to stay out of contract negotiations and leave it to some experts. Also, given that most books sell very few copies, there is a good argument for trying to negotiate contracts that allow the e-books to sell for very low retail prices (perhaps for free) during the first year of a book’s release. I wish I had negotiated that for Parentonomics.

3 Responses to "E-book royalties"
  1. As Stephen pointed out in an earlier post, the agency model could benefit publishers (and hence authors) by eliminating double marginalisation. However I’m curious to know whether this model would be permitted under Australia’s resale price maintenance laws?

  2. I don’t understand much about the economics of publishing but in the traditional hard copy market publishers usually charge a big premium for hardcover despite small additional costs. In the E-Book market there doesn’t seem to be a similar way of discriminating (except to charge more for new releases rather than less as you suggest). So I wouldn’t expect an E-Book to cost less than a paperback. Even if production and distribution is cheaper the revenues from the hardcover premium need to be made up somewhere.

  3. “Of course, with these platforms competing, that makes no sense as they should result in the same outcomes for authors.”
    They’re competing, so they should be equally appealing to potential customers (authors) in equilibrium, right? But Amazon and Apple’s bookstore are two-sided platforms (as you say) with different audiences, so it wouldn’t be surprising if one or the other extracted more from authors.

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