Publishers’ Agency Model Punishes Mid-List Authors

Publishers’ Agency Model Punishes Mid-List Authors Opinion

by Doris Booth

October 2010

Doris Booth is Editor-in-Chief, Authorlink.com

Many authors who received their royalty checks from major publishers this summer received an unwelcome shock. In a number of cases–especially among back-list authors– royalty incomes have been slashed in half as the result of the so-called new “agency model” which lets major publishers set the retail price of their books. The new scheme was touted to authors and their agents as one that would earn them just about as much royalty at 25% of the publishers net income (agency model) as they did under the old retail model-generally 8- to-12% of a book’s retail price. The new royalty rate almost sounded like a pay raise. But it hasn’t turned out that way for some.

True, the difference between 12% of the gross or 25% of the net on average amounts to a few cents per copy. Not a big deal unless the author is selling millions of copies. Where the real pain lies for the beleaguered writer is in publishers’ new retail pricing structures.

Under the old pricing system, publishers “sold” their titles to booksellers such as Amazon at a discount of 45-55% , and the reseller set any sale price it desired. But early this year, Amazon scared the bejeezus out of publishers when it started buying publishers’ e-books for its Kindle reading device for about $13 and then selling them at a loss for $9.99. Publishers feared that Amazon and other e-book retailers would drive the price point down to around $9.99 for just about every title-including high-dollar bestsellers. So publishers devised the new “agency model” that allows them to set their own retail prices and pay resellers like Amazon and Apple a flat commission of about 30% on the sale.

The squabble over who gets to set the price escalated when Amazon pulled an across-the-board “black out” on titles from publishers who didn't agree with their heavy discounts, prohibiting the sale of their books in a venue that commands about 80% of the e-book market.

Panic set in.

After huddling behind closed doors with Amazon for several weeks, the banished publishers emerged with the new agency model BUT refused to disclose details of the actual deal. Within a few days their “buy buttons” were miraculously restored to the Amazon web site. In February 2010, Hachette Books moved to the agency model, and Macmillan publishing quickly followed in March along with several other publishers. Random House, to this day, holds fast to the old retail model. And, in the long run, they may appreciate the decision. Just what are the real effects of the agency scenario on authors? Here’s an actual case:

The publisher of a successful backlist author had been selling the author’s electronic title for $14 and the author had been earning a respectable royalty. But after the agency model went into effect, the publisher dropped the price of the e-book to $6.99. Thus, the author’s royalty rate was cut in half. How did that happen? First let’s look at some numbers.

In the typical old retail model, the publisher of a $14 book could earn about $7, leaving the reseller a nice margin of roughly $6 or $7 from which to pay author royalties. If the reseller decides to sell the book at a huge discount, say, $9.99, it only pockets about $2 or $3 in profit, because it’s still paying the publisher at the retail discount rate.

In the new agency model where the publisher sets the price and pays the reseller a 30% commission, here’s how the numbers play out: on a $14 book, publisher now gets nearly ten bucks; reseller gets roughly $4 and is prohibited from selling at a discount without the publisher’s permission. Sweet.

But there’s a price to pay. And the payor becomes the mid-list or back-list author.

Here’s what happens when a backlist or mid-list title price is dropped to $6.99 on the agency model: publisher earns about $5 and reseller earns roughly $2. The reseller’s profit in this scenario is about the same as if it had sold the book at a loss—an interesting point as we shall see.

In the old model, the publisher was making $7 on the book, but now it drops the price to $6.99 and earns only $5–$2 less than it earned before.

Why would any publisher in its right mind want to sell a book to a reseller for $2 less than it was earning before? And why would a big reseller be willing to earn about the same profit on the $6.99 book as it did on the $9.99 book?

Here’s a purely imaginary account of how the closed-door meetings between reseller and publisher might have gone after the fictional reseller removed the “buy” buttons from its site.

Publisher: You can’t discount our bestselling author’s $24.95 book down to $9.99! You’ll crush our whole business. People will expect every book to sell for $9.99.

Reseller: We can sell a title for anything we like as long as we pay you at the wholesale discount price.

Publisher: That’s predatory. You are losing money. You’re trying to “buy” market share by driving down the book buyer’s perception of what he/she should pay for a bestselling book—whether in digital or any other form! And there’s no clear differentiation between the price of a book by a bestselling front-list author and all the other books out there.

Reseller: We aim to sell people as many books as possible for the lowest price we can, and yes, by doing so, we hope to own the market.

Publisher: Look, if we don’t hold up the price of our bestsellers we’ll be shut down and you won’t have any more bestsellers to sell.

Reseller: Tell you what. Reduce the price of your bestsellers to, say, $12.99, and cut all your mid-list and back-list titles to something like $6.99 . That way, we’ll cure a nasty little problem of our own: we won’t have to show our investors such drastic losses on our balance sheet, our stocks will be worth more, and we’ll still corner the market.

Publisher: Hm-m. That might be a workable compromise. Digital copies of our hardcover new releases will be priced at $14.99 and $12.99, and our new paperback releases at $9.99. Now if we drop the price on most of our back-list stuff to $6.99 or $7.99 then you’ll allow us to keep that all-important distinction between new releases and New York Times bestsellers, and all the rest? In other words, you will no longer be able to discount the price of our bestsellers?

Reseller: You got it.

And that may be why Mr. Average Struggling Author finds his wallet half as fat this year as last. To add a peculiar twist to the story, Amazon now offers its authors 70% of its earnings with one major catch. The author must sign over 100% exclusivity to the giant reseller, often seen as bad for everybody in the business.

That seemingly sweet deal, however, may be the reason literary agent Andrew Wylie signed exclusive agreement with Amazon.com to publish Kindle editions of 20 backlist titles by notable writers represented by Wylie, leading behemoth Random House to say Wylie is now its competitor and that it would not be doing any more deals with that agent. Wylie has since capitulated to Random House and removed 13 of its 20 titles from his exclusive deal with Amazon. But when we consider the math, it is easy to see why Wylie did what he did. He probably figured he could earn his authors $4 or $5 per book instead of the paltry $1 or $2 they would earn under the new agency pricing scheme.

Few really know what actually transpired between big publishers and resellers, but something smells funny–which is why two attorneys general offices are now investigating the pricing schemes of Amazon and Apple.

Macmillan CEO John Sargent explained his own agency price structure on a recent blog post: “Rather than address the long-term or author royalty consequences of the change (I’ll save that for next time), I’ll focus on the two major effects at retail.

“Our e-book sales over the last year clearly indicate that only about a third of our e-book business is in the digital versions of new release hardcovers. Unit sales of older books far exceed our new release hardcover sales, so the $9.99 and lower prices will continue to represent the largest portion of our business. In short, we will continue to do what we have always done: provide the reader with a vast selection of great books over a wide range of prices.”

But if the digital sale of older books far exceeds new release hardcover sales, then why did Macmillan and other publishers lower the price of their largest block of income? Yes, the new agency model will make more e-books available at a lower price point, but authors whose cover prices have been slashed will now need to sell twice the number of copies as under the old system just to earn the same income.

Though the agency model already has been adopted by a good number of large publishers and resellers, the issues surrounding the new pricing schemes may be far from over.

In early August 2010, Connecticut Attorney General Richard Blumenthal became the second Attorney General to look into pricing policies of Amazon.com and Apple, saying he is concerned the pacts may be anticompetitive. Earlier this year, the Texas Attorney General also began a similar review.

According to an article in The Wall Street Journal’s subscription-only site, the Connecticut Attorney General said an initial review by his office found that e-book prices offered by Amazon and Apple, as well as Borders Group Inc. and Barnes & Noble Inc., for several best-sellers were identical.

"These agreements among publishers, Amazon and Apple appear to have already resulted in uniform prices for many of the most popular e-books—potentially depriving consumers of competitive prices," Mr. Blumenthal said.

Consumers are not the only ones who have been short-changed. Beginning and less well known authors—that is, the vast bulk of writers–who have no say in the sale price of their books are suffering, too. And some of them who are not so obscure (such as best-selling marketing author Seth Godin) are defecting to the self publishing world where they can sell directly to fans.

Is it any wonder that some big publishers find themselves in a leaky boat as Amazon takes wing above? The defection seems to be about a whole lot more than the industry’s transition to digital publishing. It’s about how the guy or gal who actually writes the content gets treated.

(An added note: The French government has always had a law that protects independent bookshop owners from competition from big retailers. The law bans heavy discounting of books, but doesn’t cover e-books, a fact that now has small bookshop owners frightened. France is considering a bill that would stop big Internet retailers such as Amazon.com and Apple from hurting smaller publishers and bookstores with heavily discounted offers on e-books. See DISCOUNTED E-BOOKS SPARK OUTCRY FROM FRENCH SHOPS, The Wall Street Journal, September 27, 2010.)