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Experts Explain Google Settlement In Greater Detail

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MAIN NEWS HEADLINES
November 13 – November 20, 2008 Edition Experts Explain
Google Settlement
In Greater Detail
Authorlink Analysis
(Update, Clarification)

DALLAS, TX (Authorlink News, 11/13/2008–Several expert sources this week have given Authorlink additional details and clarification about Google’s complex $125 million settlement with publishers and authors, announced October 28.

Michael J. Boni, lead counsel for the Author Sub-Class was among those responding to requests for more insightful information and helped Authorlink clarify several important issues for writers and publishers, originally reported on Authorlink November 6, 2008.

First, here’s some background: The copyright infringement case against Google, which had been scanning copyrighted works without permission, was filed three years ago (Authorlink had originally said five years) as a class action by book authors and the Authors Guild, and by several publishing companies as an individual action, Boni clarified.

The settlement, outlined in a 323-page legal tome, will at last see authors and publishers compensated for Google’s unauthorized scans through the newly expanded Google Library Book Search Program. The rights and payment process will be administered by a nonprofit Book Rights Registry, a clearing house composed of representatives of publishers and authors.

The Registry has not yet been incorporated nor has a board of directors been formed, Boni explained to Authorlink. The initial slate of directors will be appointed by the Authors Guild and the Association of American Publishers. Thereafter, a nominating committee formed by the board will appoint subsequent directors.

The effects of the settlement reach far beyond authors who are making claims against Google in the Court case. The impact will be felt by virtually all book authors, publishers, and agents because Google–as part of the Class action settlement–plans to offer participants in its existing worldwide Book Search Partnership Program the opportunity to transfer their rights to the Google Library Search Program. While the court settlement is limited to use in the United States, Google can enter partnership relationships with anyone anywhere.

One question we are trying to answer is: just how much will authors and publishers actually realize under the new system administered by Google and The Registry, and whether this arrangement will be more efficient than if publishers, authors, and agents continue to deal with Google on their own. We’ll address the math in a moment.

First, let us understand what the settlement allows Google to sell and how Google’s $125 million peace offering will be distributed.

The settlement, now pending approval of U.S. District Court for the Southern District of New York, would greatly expand the amount of copyrighted material that Google can display online for free and for sale. Instead of the brief snippets from in-copyright works currently displayed by Google, the settlement would allow the search giant to make 20 percent of the text of a book available without charge for online viewing and printing.

Far more important than these free partial displays, however, is that the settlement grants Google the nonexclusive right to digitize, display, and sell complete editions of all out-of-print books–provided the titles have not been specifically excluded or removed from the Google database by the Rightsholder (publishers and/or authors). Revenues will be generated through Google’s subscription and consumer sales channels, and also through advertising on book pages. The Google books database will be offered free to libraries at one computer terminal. This means that out-of-print titles are “opted in” to the program, unless prohibited by the Rightsholder. Google can obtain the out-of-print books from any source in the U.S., including, for example, used book sellers.

Google also has the nonexclusive right to display in-print books, but only if the Rightsholder authorizes inclusion in the program. Thus, the default position will be an “opt out” status for an in-print title unless the publisher or author gives permission to include the title in the data base.

Google can continue to do anything it likes with titles that are in the public domain.

Under the settlement, Google will make the initial determination of whether a book is “out-of-print,” with a right of appeal by the publisher or author through the Registry. Out-of-print books represent a majority of the data base, many of which are considered “orphan works,” titles whose copyright holders cannot be found.

“The Registry will attempt to notify as many Rightsholders as possible through an extremely robust, worldwide Class notice program, and encourage as much participation as possible,” said Mike Boni. “Although many will not be found, this is perhaps the first such massive attempt to be undertaken in the publishing world.”

The Registry will not be authorized to license any books to Google’s competitors or to any other licensing entity without the express authorization of the books’ Rightsholders. Thus, presumably e-rights other than those with Google will continue to be managed through the traditional publishing process—between publishers, authors and their agents.

Participants in Google’s existing Partnership Program, with some 20,000 members around the world, can choose to stay in the current program, or transfer their books to the Google Library Project through The Registry.

“The Class consists of Rightsholders worldwide, but the books will only be used in the U.S. This means that the database will consist of both U.S. published and foreign published works, but subscription and consumer sales will be limited to a U.S. customer base,” Mike Boni explained to Authorlink.

Of the $125 million Google is paying to settle the case, approximately $45 million will be paid to authors and publishers making claims for books and inserts that Google scanned as of May 5, 2009 (the deadline by which Class members must decide whether to stay in or opt out of the settlement). Another $34.5 will be used to establish and initially fund the Book Rights Registry and for notice and claims administration; $15.5 million will go to the Association of American Publishers’ to settle the individual publishers’ action. Some of these monies will be put into a copyright protection fund for authors and publishers. An unspecified portion of that amount will go to pay counsel for the publishers, and finally, $30 million will cover attorneys’ fees for the authors. Altogether, about one-third of the Google funds will go to legal fees for this case.

Out of all of this huge settlement, what can the author expect to earn?

The settlement calls for a 70/30 gross split between the Rightsholder and Google. But Google takes 10% off the top before the split occurs, making the effective share 63% for rightsholders and 37% for Google, Mike Boni explained.

The Book Rights Registry though initially funded by the Google settlement, is eventually expected to deduct an administrative fee of 10-20% from the Rightholders’ 63% share. This means the publisher or author could get closer to 50% of the net revenue. Mike Boni stressed that the Registry fee “will be minimum amount required in order for the service to maintain sufficient operating funds and reserves.”To get a clearer picture of what an author may earn, Authorlink has calculated an example, based on an in-print book. Let’s assume that the median price of viewing or printing an online book is about $4.99. Google would get $1.84 (37%).The Rightsholder would get $3.43 (63%), less a potential 20% Registry administrative fee (68 cents). The bottom line earning would be $2.74 for the book. Let’s assume that the Rightsholder is a publisher, who pays the author a typical 10% author royalty on the cover price of an e-book. In that case, the publisher keeps $2.46 and the author earns 27 cents. Somebody please correct us if our math is wrong.

The Out-of-Print royalty, as agreed in the settlement, looks more lucrative than the in- print example. According to Mike Boni, if rights have been reverted to the author, he or she will get all of the 63% share. If the book has not been reverted, the publisher receives 65% for a work published prior to 1987, and 50% for a title published after 1987. The publisher receives 100% of the 63% share if a project is a work-for-hire.

All would be subject to the Registry’s potential administrative fee.

“The Rightsholder will have the right to sell a book for whatever he or she wants to sell it for. However, if the holder does not set the price, Google will use a ‘settlement controlled price’ based on an algorithm designed to maximize revenues from the sale of that book,” Boni noted.

The Registry probably will not begin deducting administrative fees from Rightsholders right away–not until they use up the $34.5 million allotted to them by Google. As Mike Boni explains, “They will be a nonprofit organization. They will only charge an administrative fees if they need to do so to remain operational.” He admitted that the Google funds will “only last so long. The Registry will use sophisticated and secure intelligence technology, and that doesn’t come cheap.” The Registry’s administrative fees will come from the Rightholders’ share, Boni confirmed.

In exchange for being released from copyright infringement claims for works it has already scanned, Google will pay each author or publisher (claimant) at least $60 per “principal work,” which means ten editions of a book in the Google search system will earn only $60, not $600 for all editions. The $60 payment per principal work is the minimum amount. The maximum amount is $300. The actual payment will depend on how many Rightsholders actually make claims for these payments, Boni said. The fewer the number of those making claims, the higher each Rightsholder’s share.

“Based on the theory that every book adds value to Google’s database, each book is entitled to some compensation, regardless of whether the book is actually viewed by an online user,” Boni said. The claiming author or publisher will earn a $200 “inclusion fee” out of Google revenues received by the Registry, but this amount will be paid out only over time. In addition to the inclusion fee, Rightsholders will earn revenues based on the actual usage of their books in subscription databases and from book sales. “Usage fees” for each pay period will be based on a formula that will consider factors such as the number of times a book is searched for and viewed, the amount of the book viewed, the book’s settlement controlled price, and other factors.

Authorlink had misunderstood in its initial analysis that Google would require a payment from the author/publisher to be included in the database. Not so, Mike Boni explained.

As Authorlink sees it, the Book Rights Registry potentially could become a sort of super agency for the management of digital rights. So far, its activities are related to Google. We had said earlier that the Registry is poised and well funded to easily become the overseer of content usage through any digital channel. Boni disagreed.

He said that “while the Registry will have some authority to do other deals with Google’s competitors, they can only do so with the complete approval of the Rightsholder. This means that the Registry will not be able to license works whose Rightsholders have not authorized the Registry to license their works.”

As to whether the Registry would raise some interesting questions for the Association of Authors Representatives, Boni said the Registry should pose no problem for the AAR.

“The Registry will operate on a purely nonexclusive basis. It will not be stepping into the shoes of agents,” said Mike Boni.” The Registry can’t take it upon itself to license a work to Google without the Rightsholder’s or agent’s permission. We expect that a lot of agents will be filling out the claim forms for authors involved in the case.”

The Registry will have equal representation of the Author Sub-Class and the Publisher Sub-Class on its Board of Directors, with each act of the Board requiring a majority of the directors, with such majority including at least one director who is a representative of the Author Sub-Class and one director who is a representative of the Publisher Sub-Class.

The Registry can use any unclaimed funds lying dormant for five years to “top up” its own operating and reserve funds. But remaining balances will be distributed to claiming Rightsholders entitled to revenues for that same reporting period. Any funds remaining thereafter will go to charities.

We had said in our first article that Google can—with the sanction of the Book Rights Registry—set discounts deeper than the author may intend. For example, a $4.99 book may not earn the 63% sum of $3.08 at all. If Google decides to deep discount the book, to, say $1.99 that 63% share is whittled down to $1.19, minus another 10 to 20% of the share in Registry administrative fees for a worse-case bottom line of about 95 cents. At a ten percent royalty on the cover price of $1.99, the author would earn about 19 cents. We suppose that would be better than what they might have earned had there been no lawsuit. To be fair, in today’s digital world where mass audience is everything, that 19 cents multiplied by a million sales could add up to a fair chunk of money.

Boni responded that “Google is motivated to maximize its gross revenues. They aren’t going to want to heavily discount unless it believes that doing so will be good for sales.” He said that although Google may agree to subsidize participating libraries’ subscriptions, Rightsholders will be paid 63% on the basis of the list price, not on the subsidy price.”

Under the agreement, we asked who determines in-print and out-of-print status of a book? The agent? The publisher? Actually, Google “initially” determines the classification. And if the Rightsholder doesn’t agree, he or she must go through the Book Registry to lodge a complaint. The Registry will oversee all Rightsholder requests and complaints, including any disputes about blocking the book for display on Google.

“Under the agreement the Registry will make every effort to locate Rightsholders of out-of-print books and inserts and offer them the opportunity of breathing new commercial life into their works, according to Boni. We do not expect the number of orphan works to be whittled down to nothing” he said. “But the Book Rights Registry’s efforts will represent the largest effort in history to try to find and compensate the Rightsholders of these works.”

EDITOR’S NOTE: As Authorlink explores the Google settlement in more depth, it will be interesting to hear from other experts as to who will be in charge of administering the program and who the money makers will be in this scenario. We appreciated the time that Mike Boni took to clarify the settlement, and while we might not philosophically agree on all points, his insights have been invaluable in helping us understand the legal complexities. We hope we have accurately reflected the major points in the agreement. Authorlink welcomes comments and discussion on this important topic. Interested parties can leave comments on our blog at www.authorlink.blogspot.com or in e-mail to dbooth@authorlink.com.