| The real costs of digital |
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| Digital |
| Written by Michael Bhaskar |
| Thursday, 29 July 2010 07:00 |
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Michael Bhaskar outlines why publishers believe 25% of receipts to be a fair ebook royalty It can hardly have escaped Bookbrunch readers' notice that even for the exposure-hungry world of digital publishing things have kicked off in a big way. First, The Wylie Agency launches its own imprint, Odyssey Editions, selling backlist titles of big name writers exclusively through Amazon Kindle, by-passing publishers en route. Then publishers, enraged at a move seen as undermining their investment and work (from editorial to publicity and everything in between) hit back, with Random House publicly announcing that it is curtailing business with the agency, and Macmillan US CEO John Sergent denouncing the move on his company blog. HarperCollins has expressed anger over the move. This is not to say the noise has been one sided – on the Futurebook blog, agents have been making the case that this development is actually largely the fault of publishers. An unfolding game of strategic plays and counter-plays is unfolding on the chessboard of Anglo-American publishing, with no clear sides, rules or outcomes yet apparent. At the heart of this is one question: what is a fair way to split digital revenue? There is a commonly understood industry standard royalty of 25% of net receipts. Many agents feel this is not enough; publishers are drawing their lines in the sand, believing this already to be a step back from the 15% net receipts many originally wanted. Suffice to say that it would be unwise for me to enter this debate, and I have no intention of doing so. What I can do is hope to illuminate some of the costs publishers incur when they embark on a digital program, and give a sense of why they believe this 25% net receipts royalty is fair within the context of those costs. The main argument for why royalties should be higher in digital seems to be that, given we don't have a physical book, the costs to the publisher must be so much lower. This is very easy to answer. The per unit cost of printing a book is, in most cases, not where the majority of a publishers' costs are directed. They are directed at overheads, at editorial and editorial management, at sales, marketing and publicity. Regardless of whether you have a print book or not, these costs are absolutely consistent. So really the only difference we can talk about is the marginal print cost difference, only a fraction of a book's total cost. Moreover there is then a whole new set of costs associated with digital. First, you need people, such as myself, to manage, develop and grow this new area and put in place the foundations for strong publishing companies that will last the next 50 years. Second, there is the cost of conversion of an ebook, which although small still has an impact if sales volumes are low, as they are for many ebooks. Third, there is then a host of distribution systems, business system upgrades and additions and new digital production software requiring investment. People might argue that this is a one-off cost, and once amortised should then be factored out. Yet this fails to understand the nature of most software agreements, which work as SaaS (software as a service) arrangements, whereby the software is leased on a usage fee basis. So in fact as time goes by and we use these new systems more, we will have to pay more, in absolute terms. Even basic technology can subsume surprisingly large chunks of income – DRM (Digital Rights Management) for example can eat as much as 7-9% of a book’s RRP, although this would usually not be felt by the publisher. The breakdown of an ebook, then, is remarkably similar to a print book. Let’s suppose for the sake of argument that we make a very small saving on each ebook – at most it would be no more than 5% of RRP. However, this is subsequently completely destroyed by the VAT, now about to be set at 20%. Any potential saving is more than wiped out, as we are always making 20% less. If there is any belief that the retailer environment for ebooks will be any less competitive than for print then people are very wrong. What this amounts to, inclusive of the 25% net receipts author royalty, is a business model that just about holds its head above water and contributes enough back to a publisher to cover the costs incurred, most of which are nothing to do with an ebook. All of this comes before we even get to further associated costs: the costs of developing new, often risky, experimental kinds of product to find the markets of tomorrow, frequently working with programmers and designers unfamiliar with publishing budgets; the new costs of digital marketing, sometimes erroneously bundled into the mythical land of free; the potential loss of revenue due to piracy, copy infringement and, yes, disintermediation. For books to thrive they need good publishers; this is equally true of ebooks, and if publishers are making a loss on digital products then it will increasingly undermine not only their ebook business but ultimately their print books, and beyond that the whole ecosystem of reading and writing. Michael Bhaskar is Digital Publishing Manager at Profile Books
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Comments (5)
  written by iandrury, July 29, 2010
My issue isn't with the percentage rate per se: it is the absence of an escalator. If an e-book is 'just another format', as has been argued, then we should agree escalator thresholds as with hardbacks, PPBs and MMPs.Why the flat rate?
 written by Michael Bhaskar, July 29, 2010
The reason why escalators are not automatically appropriate is two fold, and inter-connected. Firstly let me just say I am not on a crusade, strongly fighting this position but just outlining the view from a publishers side.
Ebook royalties are already much higher than other standard format royalties. So firstly, it would seem that it has already been escalated as it has pushed the boundaries before even selling anything. Remember, originally 15% net receipts was classed as the standard (admittedly by publishers). What works in tandem with this is the fact that, in the long term, ebook sales will not be incremental but substitutive of print sales. Therefore every ebook sold will be a book sold instead of a print edition. Therefore publishers will automatically be paying a much higher royatly, as a percentage of their total take. In that scenario, where net take for an author is already automatically much higher by virtue of ebook editions being in the market place, it puts question marks over the validity of an escalator, as the net take of a publisher will be hugely and actively damaged by such an escalator in a substitutive environment, where losses against today's revenue streams have already been incurred. It calls into question the whole business model. Fine, you might say, but I for one believe that readers and writers are better served by the present system than the alternatives. It might argued that digital is incremental; certainly for the next year I believe that is broadly the case. However I don't think anyone would claim that in the long run it can remain that way.  written by literary publisher, July 29, 2010
Interesting piece. But shouldn't the savings made on warehousing and distribution also be taken into account? And the savings on returns? Also, print costs vary so much - on a large, illustrated hb with a modest printrun, for example, it'll surely be more than a 5% saving. On the other hand, once the e-book market grows to such an extent that print runs become significantly smaller than they are now (meaning that the unit cost of printed books goes up), should the royalty on printed books be reduced?
I'm not arguing against a 25% royalty, I just think we need to be as precise as possible about how that figure is arrived at, as at the moment the rhetorical battle is being won by agents and authors - their argument that publishers are being greedy and exploitative is playing well in the press, perhaps because it fits with the whole narrative about the film industry exploiting creatives over digital rights, and the music industry exploiting artists, as well as consumers over CD pricing etc. written by Michael Bhaskar, July 30, 2010
Yes, agreed there are wholesale and distribution savings, but again, these are very small and are offset by the new digital infrastructure costs. On balance there are is probably a small saving, but as I think the article makes clear, this is by no means enough to justify a shift in the overall royalty. As for high production hardbacks these are firstly much, much more expensive to convert and will increasingly be made into richer applications and the like, which have production costs applicable to that of an illustrated hardback, and potentially more expensive still.
I think you are right, somehow there is a narrative building about greedy publishers that fits into that wider story, but when you look at the breakdown and the long term view on this then actually I don't think it fits at all. It just makes for a quick story. The rhetorical battle is just that, rhetoric, without a costs and business analysis. written by literary publisher, August 04, 2010
But the rhetoric is clearly persuading authors, judging from the statements of the authors' associations on both sides of the Atlantic (although interestingly the Australian authors' association has called for 35%), and from the authors, including Rushdie and Amis, who have risked damaging long-term publishing relationships by signing up to Odyssey Editions. As publishers, surely we need to explain our reasoning to them precisely and persuasively, and perhaps be more creative in the options we offer them. I'm not sure just stating that the costs of printing and distribution are all pretty negligible after all is going to be very convincing.
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