Author Royalties and Discount Creep

This post is a continuation of the previous, where co-op, advertising allowances, free freight, and other examples of discount creep were discussed.

Publishers are now increasingly paying authors a royalty based on net sales rather than a percentage of the list price of copies sold. Can a publisher add co-op fees, advertising allowances, and free freight charges to the discount calculation, thereby reducing the net sales on which the author royalty is based? There are thousands of Author/Publisher agreements still in force that simply do not address this issue, just as there are thousands of agreements that are silent on the question of who controls the eBook rights.

That is the easy problem. Here is the hard one: If the royalty is based on list price, it would seem to be the case that the author’s take would not be affected by any of the semantic gymnastics I have described. However, almost all list-price Author/Publisher agreements stipulate that if a book is sold at a discount greater than 50%, the royalty will be based on the amount billed rather than the list price. In other words, a list-price agreement mutates into a net royalty agreement when the discount exceeds 50%. Shipments to chain store distribution centers and wholesalers usually earn a 50% discount to start with. Does co-op, or an advertising charge, or free freight, boost the discount above 50%? If so, the author’s royalty is cut at least in half.

Likewise, for distributors the new practices I have described disrupt fundamental business relationships. Distributors for the most part receive a percentage of their client publishers’ net sales, i.e. a percentage of gross sales minus returns; and usually all, or most, of any co-op fees, advertising charges, or free freight allowances are passed through to the publishers. In the days when co-op and advertising charges actually bought a marketing benefit, passing the cost through to the publishers made sense. Similarly, free freight when it applied only to small customers (who just were not going to bring in books if they had to pay the freight) could arguably be passed through to publishers. But free freight for huge customers?

If what we are talking about here is just a power grab for more margin, publishers and distributors and even authors are going to have to resist. There is just no point in running a business for the sake of making your trading partners rich; and there is even less point in squeezing your small customers so that a big one can become so powerful it can completely disregard your business interests.

Curt Matthews
CEO, IPG and Chicago Review Press, Incorporated

Curt Matthews is the founder and CEO of Chicago Review Press, Incorporated, which is the parent company of Chicago Review Press and of Independent Publishers Group (IPG), the first independent press distributor and now the second largest. Curt has served on the Independent Book Publishers Association (IBPA) board and has also served as its president.

Comments (2)

wilkinsfarago says:

Apr 20, 2012

There’s only 100% of any book price to share between all players, but with all these additional costs, I guess there could be more … Many tech companies (Dell, Apple etc) have progressively cut out the retailer in order to keep control of their businesses and their margins. Maybe IPG should be doing the same …

Curt Matthews says:

Apr 23, 2012

You have to be careful when you cut out the middleman. Some of these middlemen bring a lot to the table. For instance bricks and mortar booksellers are hugely important in informing book customers about books they might want. At the moment Amazon is getting a free ride on these booksellers. Likewise professional book reviewers play an important part in publicizing books but they are not supported by the electronic booksellers. The best way for companies like IPG to control their margins is to insist that the piece of the action taken by resellers is reasonable given their real costs.