Co-author Gerad M. Levine

Whether money is the motive for writing – “[n]o man but a blockhead ever wrote, except for money” (Samuel Johnson) – or only one of the rewards for those lonely hours of composition, how does the author get paid? Before she reaches the “royalties” clause in her publishing contract she has to negotiate the “grant of rights”. What is she giving up for what she is getting?  Publishers typically apply formulas for paying authors for their work.  In exchange for granting rights that may extend beyond the grave, authors earn royalties.

Royalties were not an established convention in Samuel Johnson’s writing lifetime. What is the current practice? Royalties for trade books are typically based on list or catalog price, although some publishers pay on net receipts and net receipts are offered by traditional publishers for e-books. List price is better for the author. If royalties are based on net, it is crucial for the deducted expenses to be clearly defined. Thus, if the list price of a hardcover book is $36. and royalties (before escalations) are 10% the author’s account will be credited $3.60 per sale. Trade paperback and mass market paperbacks are similarly treated. It matters little to the author that the publisher discounts her books to a retailer because the discount does not affect royalties.

Pricing e-books is based on a different forumula. It makes a difference whether the publisher subscribes to the “agency” or “wholesale” model. This is so because under the agency model (which five of the big six publishers negotiated with Apple in 2010 and to which presently all six subscribe) the publisher rather than the distributor sets the price. The typical royalty provision for e-books reads “If published as an e-book edition, 25% of the net amount actually received from such sales.” If the distributor (Apple under the “agency” model) takes a “commission” of 30% the author will receive 25% of 70%. If the e-book price is fixed at $9.99 the publisher will credit the author’s account $1.75. (John Sargent, CEO of Macmillan in his letter to Staff following an unsuccessful meeting with Amazon on the “agency” model in January 2010, before Amazon acceded to it, stated that “[o]ur plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.”).

Independent e-book publishers subscribe to the “wholesale” model. A typical e-book contract may provide for

a royalty of fifty percent (50%) based upon Publisher’s Net Receipts for the first 2,500 units sold and sixty percent (60%) based upon Publisher’s Net Receipts thereafter. Net Receipts shall mean the amount actually received by the Publisher from the sale of the electronic editions of the Work, net of the following items: charges of third parties which sell the Work through websites or other distribution channels.

Assume an e-book has a list price of $9.99 and a discounted price of $4.99 and that the platform distributor (Amazon or Barnes & Noble) under the “wholesale” model) takes 30%, then publisher will credit author’s account $3.50 (at 50%) and $4.20 (at 60%). If the “agency” model survives an anticipated Justice Department lawsuit against the five publishers who crafted it, consumers will continue to lose on price and authors (at 25% of net) on royalties. (The anticipated Justice Department lawsuit was filed and resulted in a judgment against publishers and Google).