The Business Rusch: Royalty Statements

The Business Rusch: Royalty Statements

Kristine Kathryn Rusch

Imagine this:

Pretend you run a very large business.  The business has a lot of built-in problems, things not easily fixed.  You’re aware of the problems and are trying to solve them.  A decade ago, you actually had hope you could solve them.  It will simply take time, you thought, but back then, your business was a leisurely business.  Back then, you had no idea that the word “leisure” would leave your vocabulary and never return.

In that decade, your business has changed dramatically. Your corporate masters sold out to large conglomerates, so now you can no longer point to your small but steady profit as normal for your industry. The conglomerate doesn’t care.  All the conglomerate cares about is quarterly profits, which should rise steadily.

Your industry doesn’t work that way, but you do your best to make those quarterly balance sheets work for the conglomerate.  Unfortunately, that means any long-term outlook you used to have no longer works for your corporate masters.  Now you can only look one year ahead, maximum, because that’s all the focus the conglomerate will allow.

One of your business’s largest problem comes out of the nature of the industry itself. The success of each product cannot be replicated.  Just because you build one really good widget doesn’t mean that your next widget will sell at all.  Your business has a luck aspect to it, an unpredictability that no matter how much you plan, you can’t fix.

The other built-in problems mentioned above cause your prices to verge on too high.  If you solve the built-in problems, you might lose even more revenue, because most of those problems benefit the stores that sell your product. Those stores have made it clear they will not order from you if you take those harmful (to you) perks (to them) away.  So your prices hover at a point too high for an impulse purchase, even though your business does better when consumers can buy your product on impulse.

You have maintained this system for decades now, trying different ways to fix the built-in problems.  None of the solutions work, because the only way to fix the built-in problem would be to have an industry-wide change, one that all of the businesses in the industry agree to.  Unfortunately, if all of the businesses in the industry make that change, it will hurt stores, which will say that the industry businesses colluded to hurt their retail business—and sadly, the stores, under U.S. law, would be right.

So the easy solution is impossible, and all other solutions are half-assed.  You hang on and your business maintains a consistent, if unspectacular, profit year after year after year.

Then some changes hit your industry that force you to cut costs where you can.  Some of that cost cutting comes in employees.  You have to lay off necessary folk and hope that the remaining staff can pick up the slack.  These things have happened before, and you believe that you’ll be able to rehire in a few years.

Only this time, the economy “craters” and a global recession hits.  Every business loses much-needed revenue and products like yours, which are not necessities, sell to fewer and fewer consumers because the consumers have less disposable income.

You anticipate, cutting everything you can, dumping real estate, abandoning rent, maybe even negotiating your way out of some long-term contracts.  At the very end, though, you can’t prevent it: You cut staff to the bone.

Now, in some departments of your business, one person quite literally does the job that five people used to do as recently as a decade ago.  You have no flexibility left.

And then the industry you work in undergoes a technological revolution, one so big, so profound, that it changes the way business gets done.  Because you aren’t flexible, you adapt to the change late.  You can’t hire new employees to help with the shift without firing the remaining good, valuable (and dare we say it), unbelievably efficient employees that you kept when the recession started.  Yet your old employees can’t adapt to the new world.

Worse, this new world requires new systems.  You have to figure out new ways to produce your product.  You need to shoehorn these changes into the existing contracts with your suppliers.  You need an entirely new production crew because the old ways to produce your widgets are becoming obsolete.

And, most annoyingly, you need to develop an entirely new accounting system, because everything you’ve known, everything you’ve done, no longer applies in this brand-spanking new technological age.

But you can’t hire employees who can actually help you develop these systems.  Because those employees won’t earn you any money.  At best, they’ll prevent a loss of revenue. At worst, the systems they develop will cost you money because your suppliers, whom you pay a percentage of the retail price of the product they supply, will realize you’ve been inadvertently shorting them since the technological change hit at the same time as the beginning of the global recession.

In other words, to fix this problem, you will need to invest—in  new employees, in brand new technological systems, in new ways of doing business.  More importantly, you will have to take a huge loss as you make this change.  A loss that might eat into your profits for not one, not two, not three quarters, but maybe for two to three years, something your corporate masters will never, ever allow.

Better to close your eyes and pretend the problem doesn’t exist.  Better to hope no one notices.  Better to keep doing business as usual until profits rise, the recession ends, the world becomes wealthy again, and you can make the changes without causing a series of quarterly losses on your balance sheet.

Better to keep kicking this problem down the road until you retire or move to another company, preferably one which has already solved this problem so you don’t have to deal with it.

Does this scenario sound familiar? It should if you watch the evening news or read a daily newspaper.  Industry after industry suffers a variation of these problems, some caused by inefficiency, some by technological change, and all exacerbated by the worst recession to hit in the last eighty years.

But this blog deals with publishing, and what I just described to you is the situation at traditional publishers—the big publishers, the ones most people mistakenly call The Big Six (there are more than six, but leave it)—all over New York City.

Last fall, I dealt with these problems in depth.  Before you decide to comment on this post and tell me that traditional publishing will die (which I do not believe), read the first few posts I did in the publishing series, starting here.

I’m grappling with the changes in publishing just like everyone else is.  I knew that the changes—particularly the rise of e-publishing—would hit traditional publishing hard.  And it has, although not as hard as I initially thought.  As Publishers Weekly reported earlier in the month, traditional publishers have remained profitable in the transition so far.

The reasons why should sound familiar to those of you who read my earlier posts.  Publishers Weekly puts it succinctly:  “While the improvement in the economy helped all publishers in 2010, companies where profits improved all pointed to two main contributing factors—cost controls and skyrocketing e-book sales.”

Right now, e-books comprise about 10% of the book market, but some analysts believe that e-books will be as much as 50% of the e-book market by 2015.  Some see evidence that e-books will grow faster than that.  A month ago, a Barnes & Noble executive made news when he stated in a speech that e-books will “dominate the market” in 24 months.

We all know these figures are important.  Daily, writers tell me about their careers and then ask me if they should become independent publishers or go to traditional publishing.  As I’ve said repeatedly, I see no harm in doing both.

Earlier this month, however, I opened my mail to find a big fat warning sign of the future.  And if the problem that I—and hundreds of other writers—noted doesn’t get resolved, then traditional publishing will cease to be viable for all writers.

What happened?

I got a royalty statement for backlist titles of one of my on-going series.  The statement came from a traditional publisher.  Let me give you some background.

A few years ago, the publisher refused to buy the next two books in the series saying that while the series had some growth, the growth was not enough to justify the expense of a new contract.  I started writing some novellas in that series and publishing them in the magazine markets while I searched for a new publisher.

Then the e-book revolution hit, and as an experiment, I put up two of those novellas as e-books. Since they were the first two e-books I had ever done, the covers—in a word—sucked.  I did no promotion and no advertising, except to say in the cover copy that these e-books were part of this particular series.

In the first six months of 2010, those badly designed short novels sold about 300 copies each on Kindle, the only venue they were on at the time.  No advertising, bad covers, just hanging out waiting for buyers to find them.

I would occasionally check the Amazon sales ranking (that weird number you see on each book Amazon publishes, the thing they use to compile their hourly bestseller list).  Even though that ranking did not give me actual sales numbers, I did note that the sales of the novellas were less than the sales of the traditionally published e-books on Kindle in the same series.

In August, I wrote to the traditional publisher, asking that my rights revert.  The kind woman in rights reversal explained to  me that she couldn’t revert the book rights because the e-books were “selling too well” to revert.  Okay. All well and good. What I care about is getting books into the hands of my readers. I figured I would eventually be compensated for this.  I just had to wait until the royalty statement hit.

Which it did. At the beginning of this month.

How many e-books did the traditional publisher say I sold? 30.  That’s right. 30.

When the novellas, which had worse sales rankings from Amazon, sold 300 each.

That 30 number didn’t pass the sniff test for me.  So I talked with other writers who have books in the same genre with the same company. The writers I talked with also had some e-book savvy.

Guess what? They had been shocked by how low their e-book numbers were as well, especially in comparison with their indie published titles.  The indie books which had Amazon rankings indicating fewer sales sold more copies than the traditionally published books by a factor of ten or better.

Let me indulge in another sidebar for a moment.  I’m involved with four different indie publishers, two of which allow me to see the day-to-day operations, and one of which I own part of.  We’ve been having trouble setting up an accounting system that works efficiently for more than 100 different e-book titles.  The problem is, in short, that the ebook distributors report sales by publisher and then by title, and not by author, so if you’re published by AAA Publishing and your book is called  The Embalming and I also have an older book called The Embalming through AAA Publishing and they’re both in e-book, AAA Publisher will get sales figures on a daily basis for The Embalming. Which Embalming does that statement refer to?

Also, the e-stributors report at varying times throughout the year (some daily, some monthly, some quarterly), so if I want to know how many copies my book The Embalming sold in March of 2010, I can’t easily get that information because the info might not have been reported yet from some e-bookstore in some faraway country.

What all of the various indie publishers have figured out is that using a standard spreadsheet for each title is labor-intensive.  You can easily input data into a spreadsheet for one or two or even ten novels.  But when it comes to 50 or 100, the data-entry—figuring out what book belongs where and when (even if you use the estributor’s the computerized spreadsheet)—becomes prohibitive.

What we need is a cloud-based system that can be queried.  For example, the system should easily answer these two questions: How many copies did KKR’s The Embalming sell worldwide in March; and how many copies did KKR’s The Embalming sell through Kobo’s out-of-country distribution channels?  Right now, no spreadsheet program can answer that information easily from a pool of 100 titles and various e-book outlets without a lot of man-hours of data entry.

Traditional publishers—and indie publishers, for that matter—don’t have the staff with the ability to organize this wealth of information. Still, traditional publishers must —by contract— report the information to the best of their ability on royalty statements.

To do so, they revert to an old pre-computer accounting method.  The method existed back when there was too much data to be quickly processed. We all learned it in school.  They used little snippets of data to estimate, often using an algebraic equation that goes something like this:   If The Embalming sold (x) copies in January and e-books sales rose on a trajectory of (y) copies over a six-month period of time, then (x) times 6 adjusted for (y) equals the number of sales of The Embalming.

Close enough.  And frankly, I would be satisfied with that, if the number the publisher had come up with wasn’t so wildly off.

For me, in the instance with the traditional publisher I mentioned above, the difference between 30 copies per title and 300 copies per title is pennies on the dollar.  It’s not worth an audit.

But I never think in small terms.  My training in three fields—journalism, history, and the extrapolative field of science fiction—forces me to think in terms of the future.

Right now, e-book rights are a subsidiary right, negligible and relatively unimportant.  Between two and five years from now, e-book rights will become the dominant book right.

If traditional publishers do not change their accounting methods now, then these accounting methods will end up costing writers hundreds of thousands of dollars per year.  (In some writers’ cases, millions of dollars.)

Those of you who have any knowledge of journalism have just looked up and asked, Why the hell did Rusch bury her lead? That’s the story: publishers are screwing writers on e-book royalties.

But those of you who have had journalism careers know why I buried that lead.  When I was a news director faced with a reporter who had brought me information like the information I gave to you above, I would have said, Sounds like a good story.  But it’s all supposition.  Now get me something concrete.  Somthing I can use.

So that’s what I tried to do.  Last week, I contacted dozens of traditionally published writers who also had put up some backlist on their own in electronic format.  The writers who had the information handy responded with actual numbers.  The writers who didn’t told me that they had worried about their royalty numbers when the statements arrived, but had no real proof that anything had gone awry.

I also spoke to some trusted agent friends, several lawyers who are active in the publishing industry, a few certified public accountants, and other professionals who see a lot of publishing data cross their desks, and I asked those people if they had heard of a problem like this.

To a person, they all confirmed that they had. All spoke off the record, none with numbers.  A few hinted that they couldn’t talk because of pending action.

In other words, I got the confirmation I needed, just nothing that a reputable journalist could print.  Most people spoke to me on what’s called deep background, confirming my theory, and giving me some suggestions of places to look, and people to contact.  Several people, mostly writers, spoke on the record, but rather than using their information in isolation, I’ve chosen to keep their statistics confidential and to only go with mine.

Frankly, what I’ve learned is this:

Right now, some—and I must emphasize some, not all—traditional publishing houses are significantly underreporting e-book sales.  In some cases these sales are off by a factor of 10 or more.

This is a problem, but at the moment, not a serious one.  When e-books are 10% of the market, we’re talking a relatively insignificant amount of money per author. As one long-term writer said to me, “Ever since I got into this business, I expect my publisher to screw me on the sales figures.  This is no different.”

If you don’t understand that writer’s point of view, read the trust-me post I wrote a few weeks ago.

In the past, I would have agreed with that writer.  But I don’t in this instance.  We’re at an important moment in publishing.  We have the opportunity to change the behavior of traditional publishers.  We can, with an effort, get them to change their accounting practices.

The reason I started the blog post the way I did is this: I wanted to explain, before I got to the heart of this post, how traditional publishing works.  I wanted understanding before I worried some of you.

Because here’s the truth: traditional publishers are not indulging in a criminal act. They’re doing the best they can out of necessity.  They see no reason to spend precious dollars revamping their accounting systems to accommodate e-publishing when those dollars can be used elsewhere in the company.  Especially when an accounting change will cost them money, and might lead to payouts that will hurt quarterly profits for months to come.

It’s up to writers—and writers organizations—to force publishers to allocate those scarce dollars to develop systems for accurate e-book accounting.

If you are a traditionally published author, do not—I repeat, do not—write a blistering letter to your publisher accusing him of stealing your money.  Instead, contact any writers organization you belong to and point that organization to this blog.

What needs to happen is this: writers organizations need to band together and order group audits of e-book sales on behalf of their traditionally published authors.  One organization cannot handle the cost of this group accounting alone.  It’s better to have all of the writers organizations work in concert here.

A group audit of all the traditional publishers in various publishing divisions will force an accounting change—and that’s all we need.  But we need it before e-books become the dominant way that books are sold.

If you’re a traditionally published author who has also produced some self-published e-books and you want to do more than contact your organization, do this:

1. Look over all of your royalty statements.  Compare your indie e-book sales to your traditionally published e-book sales.  Make sure your comparison is for the same time period. For example, do not compare January 2011 sales to January 2010.

2. Compare similar books.  It’s best if you have books in the same series, some indie published and some traditionally published.  If you don’t have series books, then compare books in the same genre only.  Comparing romance sales to science fiction sales will not work because romance novels always outsell sf novels.

3. If you see a discrepancy, report that—with the numbers—to your writers organization.  Be clear in the letter you send to your organization as to what level of involvement you want in this issue.  Are you only there to provide background information? Will you take part in a group audit? Will you work on this project?

I’ll be honest.  I’m not going to participate in any group action.  Even though I’ve published with every single major publisher in New York, I only have two books caught in this problem.  I’m more interested in getting the rights in those books reverted than I am in insignificant back royalties.

If I was still a reporter, I would spend the month or two going after this story with a vengeance. But I am not.  In  nonfiction, I am just your humble blogger, stirring up the pot.  My career is in fiction, and I have found no problem with the publishers of my frontlist books.  I also have six novels with firm deadlines that won’t allow me to take time away from fiction writing to pursue this.

So all I can offer is a blueprint.

If you’re a reporter who specializes in the publishing industry and you want to tackle this story, e-mail me privately.  I’ll tell you what I can without revealing confidential sources.

If you’re a traditionally published writer, please follow the steps above.

If you’re an indie-only writer, stop gloating and for heavens’ sake don’t tell me or anyone else that this is proof traditional publishing is dead.  The majority of writers don’t want to self-publish, even when told how easy and financially beneficial it is.  They want a traditionally published novel.

Here’s what I believe: If a writer wants to publish traditionally and can secure a contract, then that writer should be treated fairly, with accurate sales reporting and good royalty rates.

Let me state again for the record.  I do not believe that anyone in traditional publishing is setting out to screw writers on this issue.  I do believe the scenario I wrote in the first 800 words of this blog: I think traditional publishers are overwhelmed and stretched to the limit.  Accurate e-book sales reporting is not even on their radar.

Right now, changing the accounting system is not high on their priority list.  It’s up to the writers—acting in concert through their writers organizations—to make accurate e-book sales reporting and accurate e-book royalty accounting a number-one priority in publishing houses across the country.

Let’s work together to solve this glitch before it becomes an industry-wide disaster for writers—anywhere from two to five years from now.

Last week, a few of you asked in e-mail why I have a donate button on this blog.  Also, last week, this blog marked its two-year anniversary. Every Thursday for two years without a miss, I have published an article on freelancing, business, writing or publishing (and sometimes on all four of those topics).  For the first 18 months, those blog posts were part of a book I was writing called The Freelancer’s Survival Guide (which, even though it’s now published, is still available for free on this website).

Initially, I had hoped to make my publishing articles into a book as well, but the industry is changing too fast.  I cannot make the publishing articles into a book that will be accurate in the short time it takes to produce.  So when this month rolled around, I did the numbers like I always do.  When I do a strict economic analysis, I am losing about $100 per week on each post—even with donations.  That’s because I can’t leverage these posts into any other income source.

However, I always ask the next question: am I getting something besides money out of these blogs? Right now, I am.  I would be doing the same research, the same work, and the same analysis with or without the blog.  I would be discussing the changes with my writer pals.  But I would lose the week-to-week contact with writers all over the world, who comment on the blog or in e-mail, sharing their own stories.

And that would be a significant loss.  It more than makes up for the financial loss.  But the donate button is here to minimize some of the financial damage, and to encourage me in busy or difficult weeks to carve out the time to write my post.

I hope that answers the question.  As always, I appreciate the feedback and all of the support.

“The Business Rusch: Royalty Statements” copyright 2011 by Kristine Kathryn Rusch.