Business Musings: Traditional Numbers

I’ve started this blog four separate times in the past week, and each time, I stopped about 1,000 words in. I have been planning to analyze some bestseller numbers that I found two weeks ago, numbers that truly had me shocked. In doing so, I wanted to check some other numbers as well, because an article about numbers is only as good as its data.

It didn’t seem to matter how many numbers I found, how much data I linked to, or how I did the math, something was confusing me. The harder I worked, the more confused I got.

It wasn’t until I was complaining about this at the weekly professional writers’ lunch that it all came clear to me: Most of the numbers I was working with were suspect in one way or another.

I’m going to explore some of these numbers in depth here. I know some of you find numbers irrelevant (which, I must say, worries me), so if long posts about information and data make your eyes cross, then skip to the last few paragraphs of this piece. Because I had a light bulb moment at lunch this week that actually hurt every single one of us present. We all were blinded by the light.

For the rest of you who want to share a bit of this journey, let me give some examples of confusing information that I explored these last two weeks:

I like numbers, and there are some fascinating ones here, and even more fascinating ones in Nowell’s slide show presentation but they are completely untethered to anything. By that, I mean, I could find no information on how the study was done, how many data points Nowell worked off of, and what he based his conclusions on.

Granted, Nielsen Book is the company that does Bookscan, so in theory, they have raw data, but as I examined the Publisher’s Lunch article (which is on Publisher’s Marketplace, mentioned last week), I found a statement that set my teeth on edge:

[Nielsen Book’s] quiet PubTrack Digital service — the only source of real, granular ebook sales data, based on invoices for ebook sales from participating publishers — shows adult fiction still accounting for 65 percent of all ebook sales.

Um, what? I’d never heard of PubTrack Digital. Where did it get its numbers? How does it track things?

I’m a journalist, trained old-school by the World War II guys, the ones who mandated two real sources for each piece of data, the ones who said that nothing got into their newspapers and magazines without some kind of reliable back-up, and, most importantly, this:

If the reporter couldn’t understand the information as presented, then that information didn’t get into the newspaper/broadcast of record. Period.

I didn’t understand what I found on Publishers Lunch. Not at all.

First of all, what the hell is an “invoice for ebook sales”? Who invoices? Ebook sales are counted in real time, and then paid monthly, no matter what account is being used. Sure, there are probably some small retailers that pay on sixty or ninety days, but would that be called an invoice?

An invoice implies this: that the publisher sent out the ebooks and then invoiced for them, the way that paper books are processed in traditional publishing. Is that how ebook financials work in traditional publishing? I have no way of knowing, and if so, it makes absolutely no sense, because ebooks are not physical items that can be sent—and invoiced for—in advance.

As a publisher, I wouldn’t send out 100 copies of Book A in ebook format along with an invoice. I would send a single data file to the retailer and work with the retailer for real-time information on the data sales. Someone might have to generate an invoice to fit into old-fashioned accounting systems, but the invoice would come after the sales were made…and why the hell wouldn’t someone just update their accounting systems?

I got frazzled, then realized the mistake was probably from Publisher’s Lunch, not in the information itself. When there’s a wording problem in a complicated news story, sometimes it’s best to blame the journalist who didn’t understand the information presented. Often the journalist, in an attempt to “fix” the language of the source, changes a word and blows the meaning all to hell.

So off I went on Friday to find PubTrack Digital. After the name of the company, there is a trademark symbol. This becomes important to what I say a bit later.

Nielsen is a global information and measurement company that focuses on consumers and consumer behavior. It has hundreds of services in hundreds of industries from radio and television to retail markets. It’s a public company, so if I had the time to dig, I could find the information I wanted.

But it would take some digging, especially in regard to PubTrack Digital. A quick search yielded very little.

What I discovered on Nielsen’s site were articles about the service from 2013. Apparently, Nielsen bought this company from Bowker (the issuer of ISBNs) in 2013. But how PubTrack Digital works and how it gathers its data remained (and remains) opaque to me. The only way I could discover how it worked was through non-US websites—one in the UK and one in New Zealand, and even those didn’t tell me how the information was gathered.

The only clue I got was from (believe it or not) the Evangelical Christian Publishers Association or ECPA (and it took me several clicks to find the real name of that organization, not just its acronym). Their website explains PubTrack Christian and PubTrack Digital

Let’s start with PubTrack Christian, which is a “collaborative publisher data sharing program.” If a publisher signs on to this program, the publisher agrees to share weekly “‘out the door’ sales and returns quantities at an ISBN & channel level” in exchange for the same information from the other participating publishers.

Books shipped and books returned. The language is vague otherwise, but shared on “an ISBN and channel level” makes me assume this isn’t by book title (our John Grisham books sell x copies) but by batch, verified by computer?????? at the ISBN level and sent out at aggregate numbers. The channels are specified here, but are also vague:

The multi-channels include “Christian bookstores, General bookstores, International markets (export sales), Internet/book clubs/catalog, Mass market retail, Publisher/distributor direct, Wholesalers, and all other.” [weird caps theirs]

In other words, this service won’t tell me how a competitor’s Christian novels are selling in the Pacific Northwest or even at Powell’s or Amazon. The service will tell me how those books are selling in general bookstores as opposed to Christian bookstores.

Okay. That makes some sense, I guess. But here’s where PubTrack Digital comes in.

The description for that service isn’t based on a physical product. It doesn’t seem to go by channel either. It uses information from 30 publishers (according to this site) to examine “the top e-book categories, authors, and titles based on unit sales and revenue.”

So, thirty self-reporting publishers send their numbers (unverified, I guess) to PubTrack Digital in order to receive information from the other twenty-nine. 

Each time I review this, my brain starts hurting at this point. But my research does tell me that Publisher’s Lunch’s description of PubTrack Digital’s methodology (such as it is) is wildly wrong. No one shares invoices on the digital side. (I’m sure there’s invoice sharing on the retail [paper] side.) PubTrack Digital relies on self-reported information, it seems, with very little in the way of verification.

Given what I know about the way digital sales work, this actually makes sense to me.

Both PubTrack Digital and Publisher’s Lunch also tell me that PubTrack Digital is the only source for aggregated ebook sales in the country. (Maybe the world, again, unclear.)

But the data is self-reporting, which makes it flawed from the get-go.

Now to that trademark symbol. PubTrack is a trademarked logo for an existing business. It costs money to apply for and maintain a trademark. Businesses often don’t use trademarks for things that have little intrinsic value. PubTrack, purchased from Bowker, has to have some kind of system attached to its measurements, a system that Nielsen wants to keep confidential. That explains the vague language on the web.

The other thing that exploring the Nielsen site told me? It costs a lot of money to hire this company. They don’t have a fee schedule on their site. You have to contact them directly to get an estimate for the work you want them to do.

Which is what Digital Book World did. They hired PubTrack Digital specifically for the conference last week.

So…I’m describing this slide show to the other professional writers at lunch, and I (the mathematician’s daughter who grew up on a steady diet of statistical analysis and probabilities [my father’s two favorite subjects]) hear myself say, “Digital Book World asked this guy to examine the impact of ebook sales on hardcover sales, making the study flawed in the first place.”

Words straight out of my subconscious. Of course, the study is flawed. Because we have no way of knowing if ebook sales have any impact on paper sales at all. No way. None.

We don’t know if people who bought paper books in the past are buying more books due to ebook availability while still buying the same number of paper books—or if those people stopped buying paper books altogether, or, if faced with a choice of ebook or paper, choose ebook. We don’t know. 

And because we don’t know, looking to see if ebooks have had an impact on hardcover sales by looking at ebook sales and looking at hardcover sales doesn’t answer the question. We don’t know if hardcover sales remained steady (as Nowell reported) because hardcover readers are hardcover readers and have sought out the hardcovers in various markets. We don’t know if the rise of ebook sales over the years is because ebooks are cannibalizing print sales or because more readers have ereaders (or tablets or phones) and therefore have 24-hour access to books and can order easily and quickly.

We don’t know if the reason trade paper sales have gone down (which Nowell reports) because most people don’t like the format or because the number of retail outlets carrying trade paper books has gone down (witness the loss of many chain bookstore locations, where most trade papers were sold) or because given a choice between trade paper and ebook, the average reader will choose ebook.

We don’t know.

So we can’t do a legitimate study of how ebooks impact the sales of paper books until we have done a study that tells us whether or not ebooks impact sales of paper books. Looking at the sales figures of hardcovers, ebooks, and trade paper does not give us that answer, because that data doesn’t address the initial question.

In other words, Nowell’s study isn’t a scientific study, but just some numerical manipulation that, in the long run, means nothing at all.

Whew. I planned this initial example to run one paragraph. Whoops.

But here’s another example.

We are only talking about bestsellers here—books that make up less than 1% of the total number of titles published annually.

That 1% figure made me stop, and do a bunch of math. And for the life of me, I couldn’t make that number work. PW did not reference where it got that percentage either. I have no idea where that figure came from.

Back to writer lunch. I mentioned that percentage, and that it was of total number of titles published, and got a major talking to from the scientists, accountants, and business minds at the table. Less than 1%? What about all the books that get ISBNs and don’t sell a single copy? Were those books counted in that “less than 1%” figure? Were textbooks counted? Was did that percentage only factor in what’s called trade publishing (marketed directly to consumers) or did the percentage include university presses, small presses, and one-time writers publishing their great-grandmothers’ memoirs? Because if that’s the case, then we’re at .0001% maybe. If we’re lucky.

In other words, what the hell? Where did that percentage come from and why was Publishers Weekly so confident in it that they could blithely mention it unsourced in an article on bestsellers?

Was it because that percentage is common knowledge?

There’s an awful lot of common knowledge floating around in the publishing industry, most of which is not based on any reality at all.

That moment led to a discussion of my comments section from last week, in which William Ockham (his nom de internet) and Data Guy (another nom de internet) talked about the reality of traditional publishing numbers.

I mentioned in comments to both of them (and then in private emails with some other folks) that during my entire career, the “numbers” in traditional publishing have always been based on extrapolations from one piece of evidence.

For example: traditional publishers used to base all of their accounting on books shipped not books sold. Why? Because books shipped was the only number traditional publishers could be sure of. The books sold wouldn’t be known for six to nine months, maybe even for a year or two. That’s because of the returns system. A bookstore could return a book, depending on the account the bookstore had with the distributor or publisher, for as long as a year after purchase.

That’s why all writers’ royalty statements have a reserve against returns, and why publishers often didn’t know what a book sold until two years after the book was published.

So publishers used a formula for returns, based on how the year was going or what the returns were in that particular segment of the market. For example, returns were higher in mass market because it was easier and cheaper for a bookseller to strip the book’s cover off and return it as opposed to hardcovers where the bookseller had to return the entire book (and sometimes pay for shipping). Which mean that returns were higher in mass-market-friendly genres like romance and lower in genres like literary/mainstream that were mostly issued only in hardcover.

So, let’s say this. (Yes, I’m making these numbers up). Let’s say in the year 2002, returns ran at roughly 50% industry wide.

The returns formula for romance might have been:

Books shipped – ¾ of books shipped = ¼ of books shipped will make money.

If a romance novel sold ½ of books shipped, it would then double the expectation ( ¼ + ¼ = ½) and would then be considered an amazing success. A romance novel that sold according to formula did well, but not great, and so on.

The 2002 returns formula for a literary novel in hardcover might have been:

Books shipped – ¼ of books shipped = ¾ of books shipped will make money.

In the case of a hardcover with that returns formula, going back to press would be considered a success. A hardcover with that formula that had half the books returned (industry standard) would be considered a failure.

Does your brain hurt yet?

Because none of those returns formulas were based on any kind of reality. They were all guesses.

In other words, all of traditional publishing from the introduction of the returns system in the 1930s to the early part of this century was based on educated guesses by the sales department in consultation with editorial.

Not based on actual numbers. Not based on real sales figures. Not based on any kind of fact-based system at all.

The traditional publishing industry is in transition because it’s gotten gobbled up by international conglomerates who need real numbers for their own internal reports. Digital book and online sales actually allow for real numbers. Since the American Booksellers Association has taught independent booksellers how to manage their inventory (at the ABA’s Winter Institute), those booksellers have lowered their returns to a maximum of 25%.

So the traditional publishing data is becoming solid, but it’s not there yet. And because so many people in traditional publishing—particularly those in its upper echelons—have been in the business as long as I have, they’re a lot more accepting of wishy-washy numbers and fake statistics. Reports that have lovely graphics and percentages that seem real are still the norm in this industry, rather than studies based on real methodology.

That’s in the process of changing, but it hasn’t yet changed.

So…we were discussing all of this at writers’ lunch, all from the point of view of major corporations, when writer, who has also worked as an accountant for large local businesses mentioned that it’s common practice for businesses that make millions every year to audit their revenue sources.

In other words, million-dollar businesses have it in their agreements with these sources of revenue—and/or the companies that manage the business’s finances—that a full audit will happen every year.

I leaned back in my chair, and around me everyone got quiet. They were all staring at me. Apparently, I had some kind of weird expression on my face.

Because my brain does not work the way other people’s brains do. And in the middle of our rambling conversations at lunch, we discussed how one of our group, a traditionally published writer, has asked his/her publisher to provide him with monthly numbers—and those numbers haven’t been adding up. (Sometimes s/he got them from the sales department and sometimes from editorial, and s/he’s discovering a heck of disparity.)

We were also discussing how one major #1 New York Times bestselling author has a single person managing his/her financial affairs. Just one person, with no back-up, no one to do a double-check, no one to make sure that one person is on the up and up. Apparently that NYT author doesn’t like handling the messy business of money and contracts his/herself. That’s a disaster waiting to happen.

So that free-floating conversation, which also touched on agents, and publishing history, and all these numbers, made me realize something:

I know of no traditionally published bestselling author who regularly audits their agents and publishers. Not a one. 

I know of a handful who have audited when something went wrong. But a standard business audit? Never.

Yet all of those traditionally published bestselling authors are million-dollar businesses, just like the local businesses our accountant/writer friend worked for are. These local businesses, these small town businesses, as a matter of course, audited their sources of revenue every year.

But writers, who make millions, and often funnel those millions through a single point—an agent and/or an agency and/or their publisher—never audit that agent, that agency, or their publisher.

In fact, several years ago, when I ran into some glaring errors in my payments from a former agency, I threatened to audit that agency. It was still handling the books my once-agent had sold for me. It wouldn’t release those books or split payments. When I pointed out the errors and demanded an audit,  the agency did the literary equivalent of flinging my books at me. The day after my threat, made in December, just before Christmas, that agency decided it no longer wanted 15% of my business, and sent letters to all of my publishers telling those publishers to send any monies owed directly to me. That agency—on its own volition—cleared me out of its entire company.

Within 24 hours of me stating that I wanted an audit, I was finally free of that agency.

This was—and is—one of the biggest, most famous agencies in New York, with several repeat #1 New York Times bestsellers. I found irregularities in royalty reports coming from overseas, irregularities that made it clear someone (probably a foreign rights affiliate agency) was pocketing my money—and, most likely—pocketing a lot more money from all those #1 bestsellers.

Because I personally know that those bestsellers don’t audit their revenue sources. Those writers don’t follow standard business procedures, the kind of procedures that businesses in a resort town on the Oregon Coast follow as a matter of course.

I am shaking as I type this, even now, because—while I’m business-minded, I learned all of my business through reading, being a business reporter for over a decade, through owning several businesses, and through the school of hard knocks. I never thought—until this week—of annual audits of revenue suppliers from a writer/business point of view.

It’s something that I’ve done for other businesses, and something that I’ve asked for as a business owner (not for my writing business).

But I’m stuck at times with common knowledge as well. Common knowledge? If you audit your publisher, you get kicked to the curb. Maybe that common knowledge is true for midlist writers, but who is going to kick a cash cow to the curb? And if your publisher/agent balks at a request for an audit, then there might be a (a really bad) reason for them to hesitate.

Now, realize, that if a writer’s publishing contract with a publisher does not mandate an annual audit, then the writer is not entitled to one. My contracts have always had an audit clause, but I’ve seen many contracts that do not—and it wouldn’t surprise me if some contracts for big bestsellers lack an audit clause as well.

Most agency agreements with authors also lack an audit clause, but there, the author has some wiggle room. Because an agent has a fiduciary responsibility to a client under agency law (not literary agency law, but laws governing anyone who calls themselves an agent [from insurance agent to real estate agent to literary agent]), the agent must allow an audit if requested—at least in most state laws as I understand them. (Realize that I am not a lawyer and I am not giving legal advice here.)

Hundreds of millions of dollars are flowing annually to writers who do not check the source of that revenue. Writers who accept the floaty woo-woo accounting practices of major publishers. Writers who know like I used to that real numbers take years to get, and probably aren’t accurate.

Oh, my.

Note too that the industry is changing, but writer-publishing accounting practices are not. Publishers still insist on sending royalty statements once every six months. Those statements are sent three months to six months after the end of the royalty period, so the numbers the writer is seeing are often a year old.

There’s no reason for that now, as my friend who asks for monthly sales figures has told his/her publisher. Except for the traditional publisher to hang onto money longer.

Why change part of the system that pays huge dividends to the publisher, when the writers aren’t requesting the change at all.

Anyway, thanks for meandering with me. I hope this all makes sense to you. Because these realizations—with the help of the professional writers at the weekly Sunday lunch—have left me a little shaken.

I hope they shake up some of you who read this, especially those of you who are running million-dollar businesses, particularly the ones whose revenue floats to a single point (the agent) before coming to you.

Good luck.

I’m having a blast with the blog again, and I’ll be honest, last year, I didn’t think I would. Sometimes rest is necessary.

However, this blog does take time from my fiction writing, which is where I make the bulk of my income. So, if you felt you learned anything or you find this blog worthwhile, please leave a tip on the way out.

Thanks.

 Click Here to Go To PayPal. (And yes, White Mist Mountain is my company)

“Business Musings: Traditional Numbers,” copyright © 2015 by Kristine Kathryn Rusch.

 




40 responses to “Business Musings: Traditional Numbers”

  1. Everett Kaser says:

    I’m one data point on the e-book vs. hardcover argument. I spent 2-3 decades buying hardcovers whenever available, paperbacks when that was the only option. Once I started reading e-books, my paper purchases started to decline, and 4-5 years ago went to almost zero. I still buy hardcovers from less-than-a-handful of authors, just because I can’t break the habit and love their books so much, but otherwise I’ve converted (as has my wife, finally) entirely to e-books. I *know* we’re not the only ones, so even if hardcover sales have (or do) increase, they would have have increased far more without e-books. That’s not DATA, just anecdotal evidence, but *I* still am certain in my ‘knowledge’ (you can’t have hundreds of millions of tablets and e-readers sold without a sizable impact on paper sales, simple fact).

  2. John says:

    These people (agents and publishers) keep and maintain all the records needed for proper reporting. The IRS requires it. GAAP requires it. The question is why can’t anyone else seem to easily get to it. As Kris and others have pointed out they have a fiduciary responsibility to their real money earners. I promise that the publishers are showing the IRS how much they are paying to each writer and agent. If the numbers don’t tie then they will be in for very large penalties. The IRS has computer audit specialists whose only job is to access their accounting systems and pull all their data for audit.

    Of course having said all of this banks have the ultimate fiduciary responsibility to all of their depositors and we see what they did to the whole global economy a few years back (and many other times for that matter).

    • They might give that information to the IRS in aggregate, John. But you’re right, a major audit from the IRS would require separate data. Good points.

    • I’ve run accounting and finance at a smaller publisher (we sold about $5 to 10 million per year, after discounts and returns).

      We had IRS audits, and author royalty audits, and everything else discussed here, and we never had an error discovered, or paid a penalty.

      BUT I can tell you that the IRS agents only checked that the amounts of the checks cut to the authors matched the amounts reported on all the different reports. They did not verify that the amounts were what they should have been. And they backed off fast from trying to figure out any of the connections between raw data and final reports. Totally overwhelmed and clueless.

      One agent actually accused the company of lying about what it did — because everyone knows that publishers have printing presses in their home offices. And so, if we didn’t have any printing presses, we couldn’t be a publisher. I kid you not.

      They verify deductions, and revenues, in total and in aggregate. They verify that every report you send them agrees with every other one. Compliance with GAAP or FASB and proper attribution of royalties to the right author? Not their issue.

  3. John Brown says:

    So how does all of this apply to KDP, and Nook, and iTunes, etc.? It seems to me that indie authors are in the very same boat. Sure, Amazon reports in close to real time, but who verifies those numbers?

  4. Thank heavens I am small potatoes and not vested in this. Pirate sites sell my books for more than I charge and keep it all. I questioned Amazon about sales I wasn’t paid for and I kept sending replies,”But. . .” They actually told me they were through talking about it. And how can you know how many of your books they actually sell?

  5. Lucy B. says:

    Thank you for this! You’re not the first author I’ve heard about who found errors in royalty statements and the agent Kristin Nelson has spoken often in the past about how she reviews all the statements that come into her office and finds a surprising number of errors (and suggests there are likely many authors out there who are losing money because they’re not taking a close enough look at their statements). I review all of my trad pub royalty statements when they come in, but I’m not sure what I should be looking for beyond checking that the various royalty rates are as they should be and running the math (cost of book x royalty rate x no. of copies sold).

    There are a lot of aspects of this business I feel well versed in — I understand the trad pub contracts, where the pit falls are, where to look for the hidden gotcha clauses, what not to accept, how to approach the indie side of things, etc. But when it comes to applying that same diligence to my royalty reports, I’m at a loss.

    • Lucy, first, kudos to you for looking. Often you don’t get enough information on a royalty statement to tell anything. (Except reserves against returns. Watch that number and see if it’s declining as per contract.)

      Otherwise, you have to look at the way the books are selling and often need another basis for comparison. I discovered problems in my royalty statements from one company after the ebook revolution started. I saw that I sold hundreds of copies on Kindle, and the the ebooks of mine in the same series from my traditional publisher sold 5 or 6 each. Then I looked at the other royalty statements from them (I had a lot), did the math, and discovered that each ebook sold was a % of the print sales. In other words, if I sold 5,000 print books, I “automatically” sold 5 ebooks. Agents can see this trend over a lot of material, and I saw it as well because I’ve written so many books, but I don’t know how a writer can see it with only a few books except to do what you’re doing.

      Btw, the royalty statements from another publisher that I worked with were always on par with my ebook sales. So if, for example, my ebooks from the same series sold 100 copies from my imprint, they also sold 80-120 copies from the traditional publisher. Not a percentage that I could find with math, and often weird numbers (like 89 or 213). The offending traditional publisher was always in a factor of 5, which was suspect in and of itself.

      Wish I could help you. I know some publishers have been trying to clean up their acts. Whether or not they’ve achieved it, I have no idea. Good luck.

    • I would advise that authors check rates, and arithmetic, as you do. I would also suggest that you check the starting numbers (say, for unearned advance, or life of title sales) against the ending numbers reported on the prior statement.

      Check sub rights payments against any sales of rights that you know about, and any foreign publications that your Google Alerts have brought to your attention. Most times, the discrepancy will be because the payment was reported on a prior statement, or the foreign publisher paid after a cut-off date, but sometimes the foreign publisher is trying to get away with out paying. And sometimes, the foreign publisher sent the money without enough information for a large house’s accounting department to figure out which title and author was supposed to get a share. (Some of the checks come without any information at all, and cover many different items. Other times, they send the acquiring editor or foreign rights agent the information, and the money goes to a different address or even a different company, which makes life loads of fun for all involved!)

      One of the things that authors don’t understand is that royalties for the masses of normal sales are easy — but in any royalty period, there will be dozens or hundreds of transactions that aren’t remotely normal, and where the person on the other side, or some helpful elf in your own company, has totally and completely mucked up the information trail. You spend 99% of the exhausting time used in prepping royalty statements tracking down gremlins in the reporting of 1/10 of 1% of the monies.

  6. Steven Mohan says:

    There’s an immense error in the study you were trying to analyze, Kris. Not JUST that the numbers are suspect (though I agree with you that they are.) But even if they WERE accurate, what would they prove? Over the time period being studied: Borders closed, B&N cut back on books, Amazon introduced Select and Unlimited, publishing contracts tightened up, we had an antitrust judgement vs. Apple and the so-called Big 6, Amazon fought a pitched battle with publishers to alter pricing, Indie bookstores are rebounding, reading methods are changing (tablets, phones), audio is exploding. Oh, and the entertainment competitors to reading are changing, too. (Think of Apple TV, Netflix, and Amazon Prime.)

    Yet this study assumes all changes in TPB or HC sales level are due to the introduction of ebooks. I suspect some of these other factors (or others I don’t know about) could also be impacting the market. It’s very sloppy thinking to assume that one factor is driving all the changes in behavior of a variable one is trying to study–esp. in a system as big and complex as the book market.

    With good, granular data someone might be able to pull some of these factors apart. Better to design an experiment. But I see no evidence anyone’s doing this–or even thinking about it.

    • Ferran says:

      Yet this study assumes all changes in TPB or HC sales level are due to the introduction of ebooks.

      This is going to read & feel weird. But, from a self defense POV, they’re following the rules to the letter… upstream. All those “Don’t…” are turning into “DO!” It worked until recently because no one gets into a pissing contest with top dogs and their lackeys.

      But, as I said somewhere else, big publishing houses have become redundant. Not necessarily obsolete (some of that, too), but even at their possible best, there are now other options, other choices, and their way of doing business is insulting. You may think that, well, business is business, but insulting people (customers and providers, here) ends up biting you back. With a vengeance.

      Where does this link with your sentence above? There a guy named Marc MacYoung, in the self defense world; he’s got a sentence: “They have fantasy solutions to fantasy problems.” Or a friend of his, Peyton Quinn and his 5 rules in SD: Don’t Insult/Challenge/Threaten him, don’t deny the fact and give him an exit. Denying the fact is in full force, here. The whole lot was present in the Hachette-Amazon ruckus.

      Take care.

  7. Randall Wood says:

    Kris,

    There was an abnormal amount of snark on that thread and I give kudos to Lee for sticking around as long as he did. If you were willing to sift through it all he did offer a few gems from his position in the machine.

    Everything I’ve managed to find backs up what you are saying, the audit seems to be both friend and foe if you are a mid-lister. The sources I have, and I can’t name them without asking them first, tell me that you have to reach a certain level before you can play the audit card without fear of reprisal. What that limit is seems to vary greatly from author to author, but they all agree that it’s there.

    So on one side there’s the unknown cost of lost sales/royalties and the cost of the audit itself vs. the reprisal and ill will of the publisher and agent on the other. I would imagine that decision would be a hard one for any author. The fact that Lee has two working full time should tell us quite a bit about how he views things. My first thought was that he had two auditors doing the same thing so he could compare their work. Now I’m thinking that the second auditor audits the first auditor.

    Related questions;

    What would an audit, one on the sales level of a Lee Child, cost? Sure, it’s a business expense, but I imagine it’s anything but cheap at any level.

    If annual audits are part of the original contract? Who pays? How are discrepancies usually handled? Do the books just get balanced, or is there a penalty involved? What’s a good schedule to have in the 21st century? Annually? Bi-annually? Daily? 🙂 I’d really like to know what Lee meant by “real-time”.

    BTW, great to see you blogging again. I missed last week but now you are back on my calendar!

    • Thanks for the comment, Randall. Oh, yeah, there’s a lot of snark on the interwebs. 🙂 I just choose not to read most of it. Life’s too short.

      The reprisal thing is what happens when audits and standard business practices are unusual (and, according to the ones being audited, should remain so). If they were common, then the publishing industry wouldn’t be able to play the reprisal card.

      Yes, it’s a consideration, but now writers have choices, so they should feel freer to act in a businesslike manner, in my not so humble opinion. (What is that, “imnsho”?)

      What does an audit cost? Depends on the auditor, the depth of the audit, whether or not the audit is on staff or acting freelance, and on and on and on. That’s like asking what a lawyer costs. It depends entirely on the situation, the lawyer, the town, the case…

      Anwyay, all of your remaining question as to who pays, how discrepancies are handled, etc, would all have to be addressed in the contract before an audit happens. My audit clauses mostly specify that I pay the cost of the audit unless a certain percentage of error is discovered. Then the publisher pays. As for how often, I think an annual audit would be an initial burden, but would become a matter of course over time. After all, if it’s expected, then it can be planned for, and the information can be organized properly, so that even if the auditor calls six months in, the information can be pulled out of the file quickly. (See antares comment in the thread.) Right now, none of that happens.

      I too would like to know what Lee meant by “real-time.” But sometimes we can get too deep in the weeds of someone else’s business. He’ll share if he feels he can, I’m sure.

      • Ferran says:

        Hey! There’s nothing wrong with snarks. As long as they’re not boojums.

        …sorry. Had to.

        And, yes, IMNSHO, or even IM(NS)HO has precedent. “Trust me” on this one.

        WRT Lee Child. He *did* have some rep at home. I sort of followed Reacher.

        Then, *he* followed AU, with some other 40+ wri… authors I’d respected.

        I take issue to people trying to scam me. From and end-buyers POV, one with no items on the table beyond his purse, the whole AU has been a bunch of producers rallying for protection rackets. Snark is what I use when I happen to be in a good enough humor.

        This ruckus, and others before, has led be to “blacklist” 40+ writers and most of the Big 5. And, the way publishing is now, I don’t miss them any.

        Another, unrelated to above point: how do *shareholders* audit? Because I’d say it’s clear that publishers are not sharing real data with their own “masters”.

        Take care.

        • Shareholders can audit, but any publicly held company is required to have an outside audit every year.

          It’s possible to pull the wool over the auditors’ eyes, because most of them are totally and completely ignorant of the basics of GAAP as it applies to publishers, much less FASB regs on publishing, but in general, very few of the large publishers have any intentional irregularities.

          What they do have, and always have had, is a big problem with data acquisition.

          Books are a weird product. Some industries sell a few copies of a lot of items, but they have hefty margins between variable costs and revenue after discounts.

          Some industries have low margins, but they sell a lot of copies of a few products.

          We do the worst of both — a few copies of a lot of titles for low margins. This is why no one has good data. No one can afford the costs of the systems required to get better data, or the effort to sieve through the data that they have to create better information.

  8. Amy Keeley says:

    Wow. My mind has been just a little blown by this.

    So, given what you and antares have said, can an indie publisher audit a distributor (e.g. Amazon, Kobo, etc.)? I don’t remember seeing that in the TOCs I’ve agreed to abide by. I have to confess I didn’t even think to look until now.

    But it seems that they also have a fiduciary duty toward me as a publisher/writer.

    • Not a lawyer, I’m afraid. The first place to start to get the answer to your question is the TOS, since that’s what you, as a supplier, agreed to before putting up your products for sale on these sites.

    • antares says:

      “[C]an an indie publisher audit a distributor[?]”

      The answer to the question depends on 1) the contract, 2) the law of the contract, 3) the law of your State, and 4) the law of the distributor’s State. You need to hire a lawyer to get that answer.

      I do not know how your distributor will react, but in every audit in which I was involved but one, the result was that the parties terminated the contract. In the one, my client closed his business for personal reasons and moved out of the state.

      What I am telling you is that if you have the right to audit your distributor and you exercise that right, be prepared to find a replacement distributor.

      • antares says:

        Hmmm. I just realized I made my client sound shady. ‘Taint so.

        His girlfriend left him. He had two businesses. He closed the one with contract problems (and where his ex-girlfriend was located) and moved to the center of the more profitable business. Closing the one ended his contract problems and allowed him to focus his energies on the profitable business.

        He was a good guy. Straight up. Were I still in practice, I would take him as a client again in a heartbeat.

  9. SpringfieldMH says:

    This reminded me of a comment/reply apparently posted by author Lee Child on The Passive Voice website in the comments section below the video…
    “I have had two auditors working full time for the last eight years.” http://www.thepassivevoice.com/08/2014/lee-child-on-amazon/

    • It doesn’t surprise me that Lee audits his publishers. He’s worked in TV, an even more cut-throat industry and is, if I remember right, trained as a lawyer. Trust but verify. What does surprise me is that you could read those horribly, horribly, horribly nasty and disrespectful comments toward Lee. I couldn’t find the one you cited, because I can’t read all that nastiness to someone who deserves respect. As I said in a previous post, even if we disagree in this industry, respect and respectful discussions should be part of what we do. Just looking at that comment section made me angry and feel a bit dirty. Kudos to Lee to even trying to respond to all that disrespect. He’s a better person than I am.

  10. Phyllis Humphrey says:

    Kris: You do a great service for authors and this is a shining example of it. Early last year I broke with the last of my trad publishers (albeit a small one) so I don’t have to worry about that. but I hope some NYTimes best-selling authors read this post and begin to ask questions. If accounting is as bad as I think it is, more writers will end up as Indies than just those who’ve finally realized 25% of net royalties on e-books is not good enough.

  11. My eyes were crossing while I was reading this. But I remember a big lawsuit involving a writer over inflated sales from a film company. Sounds like more of that guesswork and not true numbers. Honestly, shouldn’t it be like your checking account — you check your numbers against what the bank has each month and then hunt for the elusive few pennies that you probably typed in.

    People are entirely too trusting when they hand over their money. It’s like it’s easier not to deal with the questions then it is get smart about what involves them. I audit travel vouchers as part of my job, and I run into people all the time who do not verify their information. Then either they’re coming me into a panic trying to figure how they still owe $$$ when they’ve vouchered or I’m telling them they were overpaid for $$$. And it’s all self-inflicted. They assume the software is correct, the other person is right. If I make changes to their vouchers, the first thing I tell them is to double check me to make sure I got it correct.

    If people don’t ask questions, companies will get creative. I have a friend who is an actor. He was quite shocked when his agent was arrested. He got lucky though — he’d hit the age ceiling and wasn’t working much, so the agent hadn’t done anything to his money. But other clients had their money stolen. I’d bet that a lot of them trusted the agent with the money and didn’t pay any attention to it. Self-inflicted.

  12. Hi Kris –

    Your description of PubTrack Digital is along the lines of certain companies in Commodity Markets.

    One very close example would be Markit/Totem.

    In a nutshell, companies submit their commodity pricing data to Market/Totem (for a fee) and in return receive average pricing data that has been compiled from all submitting companies. The companies themselves retain anonymity. The purpose of this all is transparency in commodity pricing that isn’t among the main traded locations. The participating companies can determine how close their internal commodity pricing falls within “the market” as defined by the self-reporting companies that have subscribed to Totem/Markit’s service.

    Another example (but with a little less match to PubTrack) are the Commodity Index publishers such as Platts. Platts encourages trading companies to voluntarily (as opposed to the fee-based participation requirement of Markit/Totem) to provide Platts with data on their Natural Gas or Electricity traded deals. Platts runs the self-reported data through their own methodologies, discarding outliers and creating a series of Index prices from the main data – which they then publish. Companies can subscribe to the published Index prices, whether or not the companies participate in submitting data to Platts.

    As with anything like this, limited participation will influence results.

    • Chris York says:

      A similar thing exists in the hospitality industry. Hotel and restaurants report revenue and occupancy/cover counts to an aggregator such as Smith Travel Research. They in turn anonymize the results and report averages, highs, lows, and so on back to their members. This allows the contributing business to compare their results with those of other businesses within their industry, geographical area, market segment, etc while maintaining confidentiality of their data.

  13. Leah Cutter says:

    I run a small press. I only have four authors currently – will be six by mid-year, eight by end of year. (www.knottedroadpress.com)

    Yet my contracts have a clause (copied directly from the Book View Cafe contracts) that basically state that my authors have a right to audit if they can prove a 5% or more discrepancy between what they received for royalties and what they should get. I’m a one-person shop. (I dream sometimes of being big enough to hire minions….) But I could screw up. My press/company will live on beyond me. And I want the authors protected.

    Let’s hear it for the new world…

  14. Calee says:

    I really appreciate all of the time you’ve put into all of your business posts and have learned a lot about this industry.

    I wanted to offer a counterpoint to the argument that writers should get monthly accounting statements from their publishers. Just because Amazon’s KDP gives live sales figures, doesn’t mean that publishers not using that platform can get that data. It depends on the type of account they have with Amazon, whether they use a distributor for their digital assets, and which one. One of the largest digital distributors only provides monthly statements for their retail partners that provide them–because some digital accounts still only give quarterly numbers. As far as I know, no retailer offers live data to major publishers. Everything is delayed by at least 24-48 hours.

    As the owner of a smallish (300 title) press, it would be physically impossible to provide monthly statements–we’ve tried. Once you expand distribution channels beyond the major few players, it gets very complicated. Quarterly reporting and payment(which we do provide) is a much more accurate representation of sales. Even so, there are digital subscriptions that pay annually and others who run a solid quarter behind all of the others in their reporting.

    Perhaps there may come a time when larger publishers can offer this sort of up to date reporting, and I certainly am not condoning the imaginary data that gets passed around. But if I were an author considering a publishing contract, I wouldn’t fight for monthly reporting. Not yet.

    • Just to be clear, Calee, I’m not talking about monthly numbers. I’m talking about an annual, scheduled audit, as a matter of course.

      Monthly reporting is great if it can be done. I would love it. I’m sure many other writers would too. Glad you’re working toward it.

      • Calee says:

        I was responding to this at the bottom of your post:
        “Publishers still insist on sending royalty statements once every six months. Those statements are sent three months to six months after the end of the royalty period, so the numbers the writer is seeing are often a year old.

        There’s no reason for that now, as my friend who asks for monthly sales figures has told his/her publisher. Except for the traditional publisher to hang onto money longer.”

        • Oh, I know what you were responding to, so I clarified in the blog. There’s no reason publishers should send out year-old information. Quarterly is fine, based on the quarter that just ended. But every six months, based on information six months old? That practice needs to stop.

  15. Suzan Harden says:

    Every time I read something like this, it makes me thankful I started my own publishing company rather than sign with another publisher for my novels.

    DO you think there will ever be an accurate system to track collective numbers in the publishing industry? It seems like the major players are vested in having an inaccurate system.

  16. Ferran says:

    FYI, standard contracts in Spain (which are, I believe, much more set by law than the US equivalent) do have a paragraph were, basically, the _writer_ has to send the publisher an invoice. I managed to get out of that, but it took some convincing (and I’m on the “publisher side” on that one). The idea is publisher –> writer [info], then writer –> publisher [invoice] and publisher –> writer [bucks]. That’s due to some weird accounting legal standard.

    Also, there might be a control with the common items on PubTrack Christian. Not that Nielsen would be all that interested in publishing discrepancies.

    WRT to 1%… 1 part in a billion IS less than 1%. And it’s accurate within… less than a 1% error. It could also mean that they don’t think they can actually convey more precise numbers to their customers. Not because they don’t actually have them, but because their paying readership is not interested.

    Next, “numbers” in TradPub. As I said somewhere else…

    I know of a big-ish corporation whose Spanish section didn’t know how many units of a given item (any item) it sold. They carrier over the prior year’s predictions, then slashed the actual sales so that they could actually meet that prediction plus its growth. Unless you had access to the original data (meaning, you were in a specific off-way office) and you had kept that data privately, you couldn’t know. Including department bosses, by their own orders.

    The example is NOT in publishing. [ http://fbdorr.blogspot.com.es/2015/01/its-business.html ]

    Then… auditing. From that contract above, the one provided by the *publisher’s* lawyer:

    “The AUTHOR or his duly authorized representatives shall have the right upon written request to examine the accounting books of the PUBLISHER insofar as they relate to the WORK, once per year. Such examination shall be at the cost of the AUTHOR unless errors of accounting amounting to five percent (5%) or more of the total sum paid to the AUTHOR shall be found to his disadvantage, in which case the cost shall be borne by the PUBLISHER.”

    And, yes, I’m sure there are contracts without that part. I think the lawyer is more used to visual production than books, but it’s a guess.

    I also don’t understand your surprise. I think you wrote about it in the mid “number” “musings/ business rush/…”.

    As I see it, sorry, it’s still “business as usual”.

    Sadly.

    Take care.

    • Kate Pavelle says:

      Ferraran, I get the same thing getting royalties from the Czech Republic and Cyprus. They tell me how much they owe, I have to issue a retroactive invoice, they pay. If I really want to know if the numbers are right, I have to audit them. I believe this is one of those unified EU standards. Inconvenient, but life goes on.

      • Ferran says:

        Well, if you want to know if the numbers are right, really know, you have to audit *anyone*. And, yes, there might be a point of traceability.

        Now, riddle me this: If I publish through amazon, AFAIK, it allows me to split royalties directly from their site. Where’s the invoice?

        Take care.

    • I have never seen a trade book boiler plate that did not offer an annual audit at the author’s expense. I have always found it disturbing that KDP etc didn’t offer the same thing.

      I know of exactly one accountant who regularly audits royalty statements. I used to pick her brain regularly, and it was always enlightening. Her name is Gail Gross of IP Royalty Auditors. She knows where the bodies are buried and at which companies.

  17. Sam says:

    Funny thing. My first print book I published myself.
    When I published my second with a publisher it occured to me that I had no idea at all and no way to audit if they really printed the number of books they said.
    My other books i published myself again, so I’m not that worried about this.

  18. Kate Pavelle says:

    Wow, Kris, you really kept digging on this one! Fantastic, and fascinating. And no, writers wouldn’t know what their royalty statements really ought to be. However, there might be a flip side to this scenario. In my non-writing business, I know what a pain it is to be audited. Demanding an audit of our licensees is one of those looming eye-rollers that might happen if people don’t play nicely (small, high-tech business here.) I’ve demanded an audit once and royalties got paid a lot faster all of a sudden, and so on.
    Anyhow. Judging from your experience with your former NYC agency, demanding an audit might be a way to shake a publisher and get rights to a book reverted! Imagine if only 1% of writers did that. The administrative burden alone would bring the publishers to their knees. Something to ponder.

  19. antares says:

    Impressive. Most impressive.

    In my law experience, auditing the accounting on a contract was often the decisive move in negotiations. (That just echoes your experience.) They knew they could not withstand an audit.

    Laws vary from state to state, but you may find that you have a right to audit anyone who owes you a fiduciary duty as a matter of law. As a lawyer, I owed such a duty to my clients. When any one of them asked for an accounting, I pulled up their statements and payments, printed off two copies, and mailed them one. But I had my shyt together. It was redundant, anyway. Clients got monthly statements. Made the first of the month really busy.

    My point — which kinda got lost — is that you may have a legal right to audit someone who owes you a fiduciary duty.

    Suppose you do not have an agent (like Isaac Asimov). Does the publishing house owe you a fiduciary duty? They send you royalties and royalty statements. They hold your money. Seems like they are acting as a fiduciary. I would love to make that argument in court.

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