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A right royal battle

18.04.08 Tom Tivnan

The widely mooted, long-pro­phesied rise of the e-book for the general reader finally seems imminent. Most trade publishers, keen to embrace a potentially lucrative revenue stream, are expanding their digital programmes significantly. Yet trouble is looming in this brave new world; a battle is brewing, pitting publishers against agents as they settle the fundamental question of how authors should be compensated.

The gauntlet was thrown down in February by Random House c.e.o. Gail Rebuck, who in a meeting with agents proposed a royalty of 15% of net receipts on digital sales. That’s higher than the standard 10% royalty rate on hardbacks, but significantly lower than the 25% currently received by authors in the US for e-book sales.

Little, Brown c.e.o. Ursula Mackenzie followed suit, writing to agents to say that the Hachette publisher would also be seeking to pay 15% royalties on digital editions. Both publishers emphasised that the   rates would be short-term and subject to break clauses.

The argument from Random, Hachette and most of the big trade houses—who are said to be offering similar royalties models, some as low as 10%—is that this is what the e-book market will currently­ bear. Producing e-books still has many of the costs associated with print publishing such as advances, editorial, sales, marketing, promotion and publicity. In addition, there are a host of new costs, including converting files to multiple formats, digital warehousing, anti-piracy protection, and content and metadata tracking. The upfront investment is so formidable that Random reckons it may not turn a profit in the US—a far more buoyant e-book market than the UK—until 2013.

Futhermore publishers’ costs may not diminish after their initial investment. Sara Lloyd, Pan Macmillan’s head of digital publishing, writing for The Bookseller Daily at this week’s London Book Fair, said continuing costs would include infrastructure investment, as well as constant updates to software and systems.

She added: “And the channels to market—be it traditional retailers’ e-book stores, new digital-only e-tailers, mobile platforms or networks or other third-party channels not as yet devised or imagined—will all take their cut in the digital world just as they have in the print one.”

Footing the bill

Agents and authors, while quick to acknowledge the resources that publishers are putting into digital, are far from convinced about the necessity of the lower royalty rates for digital than print that are being put forward by some publishers.

The Society of Authors is advocating a 25% royalty on net retail receipts model. Mark Le Fanu, SoA general secretary, says: “I am not entirely sure the costs will be as great as publishers say. If you look at the audiobooks download market, publishers are selling content through a lot of intermediaries and many of the costs are being carried by third-party distributors such as Audible.”

The question is whether the issue of digital royalties is even a big enough issue yet to warrant a massive debate on royalty payments.

E-book uptake in the UK is currently so low that it is not even tracked by Nielsen BookScan.

Even in the US, with its far greater population and where both the Sony e-Reader and Amazon’s Kindle are already on the market, e-book sales are minuscule. In 2007, wholesale e-book sales hit $31.7m (£16m) according to the International Digital Publishing Forum (IDPF), which collects data from trade publishers on behalf of the Association of American Publishers. The figure represents less than 1% of an approximately $35bn (£17.6bn) US book market. Retail numbers are hazy, but IDPF suggests that it would be about double the wholesale number. The data does not include library, educational or professional electronic sales.

Print is far from dead, so why the fuss? Potential is the obvious answer. The 2007 US digital sales figures represent an increase of 24% on those made in 2006—and the Kindle did not launch until November last year.

“We aren’t going to retire on our digital sales right now,” admits Dorling Kindersley chief operating officer Andrew Phillips. “But there are many things in the air: new consoles to be launched, improvements in mobile phone technology, retailers and e-tailers getting on board. There is so much activity around the digital space and a growing public awareness about it.”

That ‘iPod moment’

Although the hype about an “iPod  moment” for books may be overplayed, the market for dedicated e-book reading devices is finally taking off. Sony is gearing up to launch its e-Reader in the third quarter of this year. Amazon is understood to be readying its Kindle for a British launch in 2008—or a Kindle II, which may feature both e-book and digital audio downloads. Eindhoven-based Polymer Vision, an offshoot of electronics giant Philips, is releasing its lightweight Readius in mid-2008. It has a five-inch flexible, rollable screen and 30 hours of battery life.

UK retailers have responded, with Waterstone’s and Borders ready to jump decisively into e-books for the first time. Waterstone’s is believed to be in talks with publishers about e-book supply with a view to start selling them through its website by July. Borders will also sell e-books from its transactional website, which launches during this month. Distributor Gardners, meanwhile, is ramping up its third-party aggregator digital warehouse programme, hoping to be a bridge between retailers and publishers.

Even without mass take-up of e-book devices, digital book content is rapidly gaining ground—to be accessed and read via PCs, laptops, iPhones, Blackberries, Palm Pilots etc. So for trade publishers, ambitious digitisation has become the norm. DK plans to have 2,000 backlist titles digitised by the end of 2008 and parent Penguin has 5,000 e-book titles already available, with another 5,000 scheduled for the end of the year, including all key frontlist titles.

But both sides admit there is great uncertainty as to how the market will develop. One digital rights executive at a major publisher says: “Quite frankly we just don’t know and agents and authors don’t know how things are going to work out. The revenue streams are incredibly low—almost non-existent—right now. And yet we, the publishers, are taking the risks. It will be years before we are even close to making money from this and I think we should see a little bit of latitude from authors.”

Indeed, some observers have even questioned the very nature of what constitutes a “publisher” in the digital age. Is a third-party aggregator, such as Gardners, which hosts an
e-book, delivers an e-book and in some cases converts the e-book into downloadable formats, now the publisher? Now, with some of these third-party aggregators even doing deals direct with agents to acquire digital rights to e-books, this is not as outlandish a question as it may seem.

It could mean a shake-up in e-book payment, such as rights switching to a subsidiary model (similar to selling books to film producers) rather than royalties on net receipts. It is an important distinction—depending on contracts, authors can get between 30% and 50% on subsidiary deals.

Katy Loffman, who advises publishers and agents with her digital consulting company Rights Solutions,  explains: “This is potentially where the whole debate may lie. Are publishers going to be paying subsidiary rights or royalties on net receipts? These are new distinctions which authors, agents and publishers need to get to grips with.”

Regular reviews

With such uncertainty and the speed at which the publishers are asking agents to clear digital rights, there is concern among authors. The SoA is urging caution and would like to see future reviews of digital rights built into publishers’ plans. “For us the crucial thing is that we are saying that there should be an initial three-year agreement on digital royalties from the publication, and thereafter subject to a review,” Le Fanu says.

United Agents’ Simon Trewin agrees. “Speaking personally, I want my authors to take advantage of the fact that this is an exciting new market,” he says. “But none of us understands how the revenue streams pan out—I want a deal that works for our authors. We need to have checks and balances. If we agree a royalty now, the quicker review we have, the better. Some groups are being more transparent about the revenue model than others. If they are open, we are more likely to agree.”

Jonny Geller, m.d. of Curtis Brown’s books division, is calling for an even shorter-term agreement. “It has to be a short-term agreement followed by a review,” he says. “You must not commit your author long term when you don’t know the value of the market. The upside is, if it’s a huge success, authors will benefit when short licences end. I would say, ‘relax’.

When one of these books becomes a market leader, then we’ll know how to negotiate.”
Pan Macmillan, for one, is listening to agents’ concerns and is offering short-term digital royalties deals. Lloyd says this will allow the publisher to produce and sell its books in digital formats, engaging with the e-market, but with an added safety net. “I think that is the best solution as we enter such uncharted waters.”

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