The Business Rusch: A Tale of Two Royalty Statements
Today I had hoped to write a blog about something other than traditional publishing contracts, but events have conspired against me. Cory Doctorow published a column on Publishers Weekly’s website about a new contract demand that might be coming from Hachette. Apparently, Hachette has decided to ensure that all of its e-books have some sort of DRM. That’s an acronym for Digital Rights Management which is just a fancy way of saying that your document will have some encryption that will make it hard (but not impossible) to share the document with other devices and/or people.
Apple has used DRM forever, particularly in its iTunes store. Amazon uses DRM on its Kindle devices—that’s why you can’t read an e-book you bought on Amazon on your Nook.
Long ago and far away (like a year ago), most people in publishing believed that DRM would stop the pirating of books. That’s before publishers realized that average readers liked sharing their books with friends and family, and DRM got in the way of that. Cory explains a lot of this, and while he’s farther into the information-wants-to-be-free side of the equation than I am, he’s got a lot of good points.
The thing I noted in this piece, however, is this:
The letter also contains language that will apparently be included in future Hachette imprint contracts, language that would require authors to “ensure that any of his or her licensees of rights in territories not licensed under this agreement” will use DRM. It’s hard to say what’s more shocking to me: the temerity of Hachette to attempt to dictate terms to its rivals on the use of anti-customer technology, or the evidence-free insistence that DRM has some nexus with improving the commercial fortunes of writers and their publishers. Let’s just say that Hachette has balls the size of Mars if it thinks it can dictate what other publishers do with titles in territories where it has no rights.
Yeah. Cory’s exactly right about this. And he’s right about the balls the size of Mars. Check out my post from two weeks ago about the non-compete clause. Publishers have been dictating what other people do with their businesses for quite some time now.
Still, I e-mailed the link to a friend of mine who happens to be an intellectual property attorney who deals with the publishing industry a lot. The attorney’s response? Not shock, not surprise, but this (and I’m paraphrasing here):
Given what I see in my dealings with the general counsels at various traditional publishing houses, I have to say that everyone in traditional publishing has gone insane.
Needless to say this clause—if indeed it exists—will be a new deal breaker. Often the same book has multiple contracts with multiple publishers. What Hachette, as your English-language publisher, wants you to tell your Russian-language publisher to publish the book in DRM. Do not sign anything that requires you to tell other publishers who publish your work in a different territory what to do. For that matter, do not sign anything that requires you to publish all your other work (not covered under this contract) with DRM attached. If I had signed a contract like that, for example, I would not be able to publish this blog on my website. I would need to have some sort of DRM on this blog to remain in compliance with this contract.
So…if a publisher demands this of you, do not sign that contract. Negotiate it away. If you can’t, walk away.
This clause has a major impact on indie writers who publish their own work in their native language, then sell foreign rights to Hachette. If you sign the DRM clause as Cory outlines it, you must make sure your indie title is available only as DRM. Do you indie writers now understand why you must pay attention to these contract discussions?
And since I’m already talking about traditional publishing contracts, I’m going to talk about another side of the contract—royalty statements.
Your contract governs what’s in your royalty statement. The percentages of the sales price that you get paid (royalties) for a hardcover book is in your statement, as well as the royalty rate for that same hardcover if it’s sold at a standard discount, a deep discount, given away, or trashed. Much of your contract—even language that you might not understand—applies to how much, and how often you will be paid for each copy of the book sold.
In these days of free e-books, your contract should even have a definition of what “sold” is. Is a free e-copy given away a sale? Or is it a promotional copy? I’ll wager most of you don’t know the answer to that question on your traditionally published books.
Here’s how your royalty statement should work. You should be able to calculate when you will start receiving royalties on your novel, based entirely on your contract.
Let me give an example.
Let’s say that you licensed your book to a publisher. (If you don’t understand why I say “licensed” instead of “sold,” get a copy of The Copyright Handbook right now.) Assume this publisher gave you a $10,000 advance against royalties. An advance, by the way, is a fancy way of saying you got an interest-free loan from that publisher, and your royalties on this book will repay that loan.
Assume (for the sake of my math skills) that your contract provides you with a 10% royalty on the cover price of any book sold. Then assume that your publisher publishes that book in a $25.00 hardcover edition. Assume also that you will get royalty statements every six months as is customary.
So here’s what should happen in that instance. You should get $2.50 for every book sold. After 4,000 copies of your novel, you should start earning royalties. What happens at 4,000 copies? Why your interest-free loan (or as you call it, your advance) gets paid off. ($2.50 x 4,000=$10,000.)
When I got my first publishing contract back in the Jurassic Period, I sat down and did the math on when that book would earn out its advance. I believed I would start seeing money over and above my advance within two years of publication.
Even though the book sold many more copies than I needed by those simple calculations to earn out its advance, I never received royalties on that book. The publisher did not cheat me. I signed a contract that gave the publisher too many loopholes. Discounted books received a smaller royalty. Books sold in certain chain bookstores got a smaller royalty than books sold in independent bookstores. And on and on and on.
I got nickel and dimed to death by the publisher, even though I had a very good contract for the time. All of those different payouts, by the way, were delineated in the contract. I just didn’t understand them.
These sorts of delineations and the interpretation of them are behind the class action lawsuit that writers have brought against Harlequin this summer. The writers claim that Harlequin is playing a shell game so that it can pay a lower royalty rate on certain types of books.
Harlequin isn’t alone in trying to charge a lower rate under the contract than the rate the writer assumes applies. Harlequin is simply being more blatant about it, and going about it in a way that is easy to catch.
When large companies try to pay lower rates to their suppliers, it has an impact on the supplier (of course), but it usually saves the company millions of dollars (spread out over all suppliers). It is in the company’s best interest to pay as little as possible for the goods it receives. It is in the supplier’s best interest to get paid as much as possible for the goods provided.
Most writers do what I did back in the Jurassic Age. They shrug, and figure that the industry is too complicated for them, the contract too arcane. They simply go on as if nothing happened.
Me, I started my quest to understand contracts right then. And I learned that big names get better terms on everything—including discounted books—than I (as a midlist writer) ever could. If, of course, the big name writer knew how to negotiation a contract. Which, I have learned over the years, is a very big if.
I still play that payout game when I sign a traditional publishing contract. Several years ago, I signed with two companies that were new to me. I signed with them both in the same year and their contracts were similar.
In fact, one had a contract that I would call iffy. It had some terms in it that I really didn’t like. However, that contract—let’s call it Contract A—defined those terms very narrowly.
I did the math. I figured that if everything went as promised by the editor and by the contract, I would be earning royalties on the books in that contract in 24 to 36 months. I mentioned this to Dean, then we both laughed. We knew the likelihood of my earning any royalties on those books was between slim and none.
Contract A covered three books. Contract B, from the other company, only covered one book. The terms of Contract B seemed a lot better than Contract A, right down to this lovely promise: all payments were due within thirty days of fulfillment of each contract term.
By putting that in the contract, a payment that was overdue by one day breached the contract. In other words, if I didn’t get paid, the contract got canceled.
If you had asked me on that day which contract was better, I would have said Contract B. It was for one book, it licensed fewer rights, and it had clauses that benefitted me like that payment clause.
Over the years, I sold two more books to the company that issued Contract B. Those were Contracts C and D. Those contracts were identical to Contract B. They were fine.
I sold other books to the same company that issued Contract A. Those contracts got progressively better as the company revamped its contracts and as I became more savvy about what to ask for in this new world of publishing.
Problems showed up with the company that issued Contract B almost from day one. The signing payment on my advance was late, so late in fact that I told them that I would not turn in the book until I received the payment. If they couldn’t pay me quickly (within two weeks, as I recall), then they breached the contract and I would be free to sell my already-completed book elsewhere.
They begged me to reconsider, asked me to wait until the end of the quarter (a month away), and when I refused, angrily cut me a check. This process got repeated with each check owed. I must be honest, however. Because of that clause and my willingness to enforce it, that company paid faster than any other publishing company I had worked with.
The issues got stranger as the royalty statements became due. I didn’t understand the first royalty statement issued for Contract B. Information seemed to be missing, and a lot of stuff just seemed off.
The first royalty statement for Contract C never arrived. When my agent requested it, he was told that the book had only been out for a month and the company never issued royalty statements that early(!) Even though the contract required it. Even though I had received the first royalty statement for Contract B that early. By then, I had already turned in the book for Contract D and that book was in production. I had turned down a fourth project with the company because they were so awful to deal with on the business side.
The editor, by the way, was wonderful.
When the next royalty period arrived, I had a real surprise. My books—contracted separately—were basket-accounted.
For those of you who are unfamiliar with basket accounting, this is what it means:
A writer signs a contract with Publisher Z for three books. The contract is a three-book contract. One contract, three books. Got that?
Okay, a contract with a basket-accounting clause allows the publisher to put all three books in the same accounting “basket” as if the books are one entity. So let’s say that book one does poorly, book two does better, and book three blows out of the water.
If book three earns royalties, those royalties go toward paying off the advances on books one and two.
Advance for book one: $10,000
Advance for book two: $10,000
Advance for book three: $10,000
Book one only earned back $5,000 toward its advance. Book two only earned $6,000 toward its advance.
Book three earned $12,000—paying off its advance, with a $2,000 profit.
In a standard contract without basket accounting, the writer would have received the $2,000 as a royalty payment.
But with basket accounting, the writer receives nothing. That accounting looks like this:
Advance on contract 1: $30,000
Earnings on contract 1: $23,000
Amount still owed before the advance earns out: $7,000
Instead of getting $2,000, the writer looks at the contract and realizes she still has $7,000 before earning out.
Without basket accounting, she would have to earn $5,000 to earn out Book 1, and $4,000 to earn out Book 2, but Book 3 would be paying her cold hard cash.
But here’s the thing: You can’t have basket accounting without a basket. The contract must provide for this strange accounting method, and not one of those three contracts did. Even if Contract D had a clause for basket-accounting with Contracts B & C, those contracts would have had to be amended for that clause to work. I did not sign any amendments, nor did Contract D provide for it.
My agent and I complained about this. We were told that the books are not basket accounted, but that the publisher’s system just showed up that way on the royalty statement. That way, the publisher could keep track of what it owed each writer. It was an internal thing, nothing more, and wouldn’t have an impact on payouts to me. And, to make things even more interesting, we got a check for e-book royalties with that letter.
Weird, since none of the books had earned back their advance (interest-free loan) yet, and all e-book royalties should go against that advance according to the contract.
I’ll be honest. I really, really, really want to get away from this company. So we sent the check back to them telling them that there are a lot of errors in their royalty statements and we needed accurate royalty statements. If we did not receive accurate statements within six months (which was the next royalty statement), we would consider this a breach of contract. (The contract calls for accurate royalty statements.) The letter went to the publisher, not to the accounting department or to the editor, but to the person at the top.
Who wrote back and said that these were just accounting quirks and we need to live with them. We got a legal statement signed from the publisher, saying that this is how their accounting system works, that the books were not basket-accounted, and we would continue to receive e-book royalties separate from print royalties.
Can I fight all of this and get the contracts canceled? Yeah, but it would take attorneys. Will I do it? No, because there are other contract clauses I will use in a few years to break these contracts in a much easier (and much more painless) fashion.
If I didn’t have those other clauses in the contract, I would be fighting to get out of this contract right now. Because this company is not trustworthy and, I suspect, is having serious financial problems. I’ve suspected that for years now.
Honestly, this company has the messiest, stupidest royalty and accounting system I have ever seen (which is saying something). This company, while not part of the erroneously named Big Six, is a large company with a name you would recognize. They’ve been around for more than 15 years.
So has the company that issued Contract A. (See? I haven’t forgotten it.) At the same time I was dealing with the royalty statements for Contracts B, C, and D, I received a royalty statement for Contract A.
Along with a nice check for royalties earned.
I about fell over backwards. Remember I told you that if that particular company followed its contract to the letter, I’d receive my first check 24 to 36 months after publication? Well, the check arrived 18 months after publication. One royalty period sooner than expected.
Why was my calculation off? Because the first book in that contract sold better and faster than I had expected.
Everything—and I do mean everything—in that royalty statement is easy to understand. Even better, the sales figures match or exceed the sales I receive from other books written under that name. The statement is accurate, clear, concise, and goes point by point with the terms of Contract A.
This is the very first time in more than twenty years of publishing novels that any company has ever followed its contract to the letter in regards to its royalty statements. No obfuscation, no dicey interpretation of contract clauses, no surprises at all.
The very first time.
And that’s how contracts and royalty statements should work. They should be parts of a whole, so that both parties—publisher and writer—know exactly where the project stands at any given time.
Since we’ve been discussing deal breakers and ideal contracts, let me add one more thing. As small business owners, we writers need to make sure that our contracts call for accurate royalty statements issued in a timely manner.
Then we should demand that all of our royalty statement experiences be like mine with Contract A. We should consider an inaccurate or poorly done or impossible-to-understand royalty statement a violation of our contracts. We should also be willing to defend our rights: if we get a bad royalty statement—impossible to understand, hard to see if it follows the terms of our contract—we should ask for a clear statement. If we don’t get one, then we should find out why.
We need to fight for this as hard as we fight for good contract terms. Because the contract terms mean nothing if we don’t make sure that they’re executed properly.
Remember, we writers have choices now. We can indie-publish our work and make quite a bit of money. If we choose to go with a traditional publisher, then we have to make sure that the traditional publishing deal is worth our while.
The contract clauses I’ve discussed for the past month are part of that. But so are the royalty statements themselves. The days of shrugging when a confusing royalty statement arrives are over. We have to demand clear statements, clear accounting, and clear terms.
If we don’t, we’re as much to blame for any loss of income as the publisher itself is. As small business owners, we need to monitor and enforce our contracts. Making sure our payments are both accurate and on time is part of that.
It’s time for traditional publishing to make large changes, and I’m not talking about the kind of changes that some publishers (like Hachette) seem to want. Those publishers want writers to give up any semblance of autonomy. We writers need to recognize that we have more autonomy than ever. If we give that up, then we only have ourselves to blame.
So demand accurate and understandable royalty statements. If you’re not willing to do that, then you probably want to stay away from traditional publishing. Because if you don’t ask for clear royalty statements, you will lose money. You just won’t know where or when.
It’s amazing to me how rapidly traditional publishing contracts are changing. I think my lawyer friend is right: traditional publishers have gone crazy—but only because they’re scared. They know they’re playing by old rules and they don’t know how to play by new rules. So they default to the old way of doing things by trying to dictate unreasonable terms to the authors.
I’m moving off this topic for a while. I can guarantee, however, that I’ll be doing more about it in the future.
You all have been great in supporting this short series. In the past, donations have dropped off as I’ve done these kinds of posts, but this time the drop-off has been less severe. Thank you for that. And thank you for the links, comments, emails and forwards. I appreciate that as well.
So, as usual, if you’ve gotten anything out of this week’s blog or any of the business blogs, please leave a tip on the way out. Thanks!
“The Business Rusch: “A Tale of Two Royalty Statements,” copyright © 2012 by Kristine Kathryn Rusch.