January 8 – January 15, 2008 Edition

Random House's
New Digital Royalty
Structure–a Model Plan

Random House's new royalty structure for e-books and audiobook downloads may become an industry model for other publishers to follow. The new plan will have a huge, hopefully positive, impact for authors and agents who have book content in the new and chaotic digital retail environment.

Random House is the world's largest general trade book publisher. It is a division of Bertelsmann, one of the foremost media companies in the world. In October, 2008, the company quietly announced in a letter to industry insiders that it would change its royalty structure for e-books and audio books, declaring that "the publisher's list price will soon no longer be a relevant basis for calculating royalties in the digital environment."


Effective December 1, 2008, the new rate for both Random House e-book and audiobook downloads became 25% of "the amount received for all sales." Also, the reduced royalty rate for "high-discount sales" has been eliminated. In earlier days, the publisher reduced the author royalty rate on sales where the publisher had to give retailers unusually deep discounts.


Here's how the new policy applies to existing contracts:


All existing audiobook authors are being asks to amend their contracts to reflect the 25% rate. All existing e-book authors with e-book rates in their contracts will not be required to amend their contracts. All backlist titles for which no e-book royalty has been provided, will be adjusted to the new terms. For those with existing e-book contract rates lower than the new 25%, Random House will automatically adjust the rate upward to the current one.

How will this affect authors? Let's look at an example. Under the old RH system, the author of an e-book or audiobook would typically have received 15% of the $7.99 "list/cover" price: $1.19 (after earning out the advance. It had typically been 25% before earn-out).


Under the new system, the author royalty will be based on the constant rate of 25% of actual income to Random House. The online retailer now buys the book from RH at a negotiated wholesale discount, say, 44% off the list price or $4.47. The formula looks like this: $4.47 x .25=$1.11-pretty close to the old earning, but with a wider opportunity for market exposure in the electronic world. In other words, the author will earn about the same dollar amount (i.e. 15% of list price when sold t a 40% discount equals 25% of the amount received) for non-subscription sales.


Here's another positive aspect of the new deal. In the traditional model, if the publisher sells to a retailer at a "deep discount" of 55 or 60% off, the author's royalty rate drops, typically to 5% or 10% of the "amount the publisher received," depending on his/her contract terms. The publisher earns less. So does the author. In the new model, however, the author gets a constant 25% of whatever the publisher earns from the wholesale deal. So, let's compare the two. If the wholesale price of the book drops from $4.47 to $1.78 (60% off), the author earns 5%, or about 9 cents in the old system. But, in the new system, he/she earns about 45 cents-a much better deal. In a high-volume sales situation, this could be a much more lucrative deal for the author.


"We believe that the actual amount received by the publisher from each sale is the more relevant benchmark for measuring the author's financial participation in the market and guarantees the author a fair share of the proceeds," the RH letter said.


"In the digital world there is no packaging on which the publisher's price can be displayed, and online retailers are increasingly electing not to post the publisher's list price among the data included on their websites As a result, the digital list price has lost its value as a market measure and by extension as a basis for royalty," the letter said.


"The potential for reinvigorating backlist sales is one of the many opportunities we hope to realize with the emergence of e-book and digital audio markets," the letter said.


One reason the digital list price is losing its validity for many publishers is that large online retailers are now beginning to mix non-subscription sales with new subscription-based sales models, though this was not the driving catalyst behind RH's digital restructuring.


Two major online retailers, Amazon and Google, are now offering subscription models in addition to non-subscription sales. Amazon recently acquired, a site offering a huge selection of downloadable audiobooks based on a subscription model. Consumers pay a monthly fee to access the titles. Customers buy "credits" which are then applied against the price of a download. Subscribers pay $7.99 for the first three months or $14.99 per month thereafter to buy one credit, or $22.95 for two credits. They can also buy 12 credits per year for $149.50. Google has also launched a subscription model for library and university book sales and plans to include that model for backlist titles involved in the Google lawsuit settlement. (See links below).


In the complex mixed-model sales environment, it is difficult to tell who's earning what, and from where. Author earnings for digital sales will be determined by what wholesale pricing publishers are able to negotiate with digital retailers.


To be sure, it looks like major publishers will be able to negotiate much better deals on backlist titles than authors who are part of the $125 million Google legal settlement. (Google Settlement has a Few Unforeseen Wrinkles, Authorlink Nov. 6, 2008).When a rightsholder who is party to the settlement leaves Google to decide the price of a digital book, Google applies a royalty rate based on what it calls a "controlled pricing bin." For example, a book that sells for $7.99 (digital list price) earns 6% royalty (48 cents). Not such a good deal. Also see: Expert Explains Google Settlement, Authorlink, Nov. 13, 2008).


The economics of publishing in today's electronic formats pose new challenges to everyone in the publishing business-authors, agents, publishers, and booksellers as well. At this point, it looks as if large publishers have a better handle than most entities on how to cut fair deals for their authors.