Running the Numbers on a New Publishing Model

Yesterday's New York Times Business section reported:

HarperCollins Publishers is forming a new publishing group that will substitute profit-sharing with authors for cash advances and will try to eliminate the costly practice of allowing booksellers to return unsold copies.

Good luck to Robert S. Miller, who's leaving Hyperion after seventeen years to head this venture. He's going to need it.

Allowing bookstores to send back unsold copies for full credit is a standard industry practice that dates back to the Depression. The first publisher to offer those terms was Simon & Schuster, which had stumbled onto a gold mine with the first crossword puzzle collections. Most of its initial titles were crosswords books. Those were ideal for experimenting for fully returnable sales; customers couldn't do the puzzles and then return the books to the stores to return them to S&S.

Today, "fully returnable" is standard in most of the book industry. Mass-market paperback publishing works on the basis of "cover returns," meaning stores don't even have to send back the whole book. Booksellers, who think their financial situation is just as precarious as authors' and publishers', will be skeptical of any non-returnable deal unless it also offers them better-than-usual terms, such as a discount higher than 50% off the cover price. And even then the people likely to suffer most from non-returnable terms are new, unproven authors; booksellers will be wary about stocking their books in case those copies don't sell and the store is stuck with the inventory.

And now that I've broached the arithmetic of the situation, the Times article reports that Miller hopes to "offer authors a 50-50 split of profits." How will that really work? Profit-sharing has long been on literary agents' wish lists. I recall hearing the Publisher of the book division I worked for, David C. Miller (now a literary agent, and no relation to Robert S. Miller), describing how an agent had said that would be part of his ideal deal.

David also pointed out the following math. When a publisher commits to a standard 10-15% royalty on the cover price of a hardcover book, but sells that book to a wholesaler or bookstore at a discount of close to 50%, then the royalty amounts to 20-30% of the publisher's gross revenue. Even a 7% paperback royalty translates in about 14% of the gross. Under the new HarperCollins model, authors would give that up for 50% of the net profit, presumably after the costs of production, printing, and marketing.

Anyone who's spent more than a few months in Hollywood knows that actors, writers, and directors never see a percentage of the net profit if that's what their contracts promise; the only deals worth fighting for stipulate a slice of the gross revenue. Hollywood accounting is legendary for its trickiness, of course. Publishing accounting is more straightforward, but publishing companies have never had an incentive to calculate a low net profit before. Authors have always been paid out of the first revenue the book earns, not the last.

The Times erroneously states:

Typically, authors earn royalties of 15 percent of profits after they have paid off their advances. Many authors never earn royalties.

The 15% royalty is typical of hardcover sales only after a certain number (say, 10,000 copies) sold at lower royalty levels. Royalties have nothing to do with "profits," as described above. And while many authors never see royalty payments after publication, their books do earn royalties as long as they sell.

Indeed, the advance system that this HarperCollins division will try to avoid lets authors receive money from their books' royalties even before those books are published and start earning those royalties. Hence the term "advance." Will authors and their agents really prefer the uncertainty of profit-sharing over guaranteed cash up front?

The key to understanding this new sort of publishing economics seems to lie in the types of books Miller's division will publish. Again with the Times:

The new group...will most likely publish hardcover editions priced at the low end of the market, around $20 a copy. She pointed to some of the titles that Mr. Miller had published while at Hyperion as models, including The Five People You Meet in Heaven by Mitch Albom and The Best-Loved Poems of Jacqueline Kennedy Onassis.

In other words, books from household names who have already created blockbuster bestsellers, aimed at the vast middlebrow market, and priced to go immediately onto the next bestseller list. This model can't work with anything less than a guaranteed mega-seller. For a guaranteed mega-seller, bookstores would be willing to forgo returns. For a guaranteed mega-seller, profit-sharing would make more sense for an author than an advance against royalties. But only for a guaranteed mega-seller.

Of course, everyone in publishing would like to identify guaranteed mega-sellers. No one can. That's why the current system of advances, royalties, and returns evolved as it did.