Publishers Weekly, June 2016

Could Publishers and Agents Agree on a Flat Royalty Rate?
Insiders say the problem is still e-book royalties

Publishers Weekly, June 3, 2016

By Rachel Deahl

Since e-books became a crucial source of revenue for publishers six years ago, the royalty rate on the format has been an ongoing bone of contention between authors (and their agents) and publishers. While authors and agents have stood firm on their position that the standard rate of 25% (which refers to the percentage of net profits authors receive on e-books sold) must change, publishers haven’t budged. Could a flat royalty system, in which one rate is used across formats, be a solution? Though some industry members believe a single rate could simplify a complicated royalty structure, agents said the move wouldn’t address the real problem: authors being shortchanged on the profits from their e-books.

The idea for a flat royalty rate came up during a panel at last month’s BookExpo America in Chicago. The panel was moderated by Mary Rasenberger, the Authors Guild’s executive director, and focused on changes to standard publishing contracts that could make them more equitable to authors. During the session Hachette Book Group CEO Michael Pietsch, when asked about the possibility of doubling the current e-book royalty rate to 50%, said there could be alternative ways to see to it that authors get a bigger slice of the profits. One possibility he offered was to come up with a flat royalty that could be used across formats.

Currently, each of the major formats a publisher usually acquires—hardcover, trade paperback, e-book, and mass market—carries a different royalty rate. The standard publishing contact stipulates that these rates begin at a certain percentage and then go up as sales of the book increase. So, for example, the standard royalty rate for hardcovers is 10% on the first 5,000 copies sold, then 12.5% on the next 10,000 copies sold, and 15% thereafter. Similar escalators are built into the rates for trade paperbacks and mass markets, with trade paperbacks starting at a rate of 6%–7% and mass markets starting at a rate of 8%.

The reason different rates were created for different formats, as a number of agents explained, was to address the different costs publishers took on in creating each format. The royalty on hardcover books levels out at 15%, the agents said, because this figure was intended to deliver a 50-50 split of the profits for the author and publisher.

Because the standard print royalty rates were set up so that authors and publishers ultimately hit a point where the profits would be shared equally, agents and the Authors Guild have consistently said the e-book royalty rate is unfair. Many agents claim the 25% figure, created before e-books became such a large slice of the market, is essentially an arbitrary one. And, as the agent-Guild argument goes, because e-book manufacturing costs are low, the royalty split should reflect those lower costs.

Pietsch told PW he believes moving to a flat-rate royalty system for the life of a book is worth discussing as a way to relieve the confusion that crops up with the current system. He said HBG is willing to continue to talk to the Guild about different proposals and that if HBG “comes up with something that makes sense for both sides” he would talk to agents on a case-by-case basis about the publisher’s thinking.

Agents, for their part, seemed suspicious of the notion. “When I’m looking for better royalties out there, it often has do with e[-books],” said Jennifer Weltz, of the Jean V. Naggar Agency. “That’s where the issue is.” Adding that she doesn’t feel a flat royalty rate would ultimately work to get authors a better payout, Weltz said she would like to see escalators more regularly built into the e-book royalty rate and has already had success achieving this in the international market.

When asked what he thought of the idea of a flat royalty rate across formats, Robert Gottlieb, chairman of Trident Media Group, was more blunt. “I’m always open to hearing about things that are beneficial to our authors… I just don’t generally hear those things from publishers.”

Many agents expressed a similar sentiment to Gottlieb’s — that, essentially, publishers would never propose a single royalty-rate structure unless it benefitted them financially. Because no actual rate has been suggested, most agents presume that whatever number was proposed would not allow their authors to earn more money.

For Rasenberger the idea of a flat royalty rate, at least in theory, is worthwhile. Though she acknowledged that it would only work if the rate was fair to authors, she likes the fact that alternatives to the standard contract are being discussed. In response to literary agents who said no major publisher would ever offer a single royalty rate that brought authors more money than the current standard, Rasenberger said that the goal is to get a conversation going.

“We have to fight for what we need, and it’s much easier to do that if there’s one [royalty] rate,” she said. She also likes the idea of publishers offering alternative contract options. She mentioned that some smaller publishers are offering higher e-book royalty rates, especially in cases in which authors forgo advances. And she noted that more American publishers do now seem open to the idea of adding escalators into e-book royalty rate. “We’re not asking publishers to all do the same thing; we’re asking the opposite.”

Ted Weinstein, who has an eponymous agency, said he doesn’t see a flat royalty rate as a solution for getting authors a bigger slice of the profits from their books. And although he feels that raising the digital royalty rate to 50% is the “right philosophical model,” he recognizes that publishers currently have little incentive to make this change. So what might move the needle?

In Weinstein’s eyes, there are two scenarios — though he thinks neither is very likely to play out anytime soon. Publishers could find that the high advances they’ve been paying — usually offered to bestselling authors to keep them in the fold, and to authors who have sought-after new manuscripts — are being regularly miscalculated. In other words, if publishers realize they are spending more money by paying huge advances, as opposed to raising the royalty rate, they could have a change of heart. Another possibility is if a significant number of bestselling authors, unhappy with the current digital royalty rate, start self-publishing or moving to smaller houses.

This article appeared in the 06/06/2016 issue of Publishers Weekly under the headline: Could a Flat Royalty Rate Be Embraced By the Industry?