Tag Archive - Money

News You Can Use – April 17, 2012

April 17, 2012 in News You Can Use with 4 Comments

Getting by on a Writer’s Income – Lawrence Block reflects on the challenges of the writing life. An excellent article from someone with a half a century of experience.

Microsoft Word is Dead – Tom Scocca in “Slate” makes a bold claim. I would vehemently disagree from the point-of-view of writers and editors and publishers. But he may be right when it comes to office collaborations and the like.

Mary Poppins Author Regrets Selling Movie Rights to Disney – A story behind the story. What we may have seen as a delight the author saw as a violation. Our family happens to have enjoyed both the movie and the original books.

—– Articles about the Department of Justice Lawsuit —–

One Bad Apple Don’t Spoil…on Second Thought – Bufo Calvin weighs in on the DOJ lawsuit

Agency is Dead, Long Live the New Agency – No, the article is not talking about literary agents despite some of your wishes. Instead Philip Hughes looks carefully at the DOJ lawsuit and asks some great questions.

Amazon E-book Pricing a Thorn in the Flesh – Fascinating look at a publisher that has willfully removed all their books from Amazon’s web site despite the risk of lost sales.

The DOJ Lawsuit Won’t Solve the Big Problem – Emily Bell in the UK sees the issue a little differently.

Where is My Money?

February 27, 2012 in Agency, Business, Contracts, Steve with 8 Comments

By Steve Laube

Before I became a literary agent I had no idea how much energy this profession spent being a “collections agent.” Recently someone asked us the following questions (use the green button to the right to ask your question!):

What do you do, as an agent, when a publisher does not pay advances on royalties on time as per their legal contract?

What if a publisher is consistently late (months) saying they have cash flow problems and will pay when they can? Shouldn’t authors be able to count on getting paid the amount and on the date stated in their contract?

Is this common and is there anything that can be done or said regarding what seems to be a breach of contract?

This is an excellent series of questions. The full non-answer is “It depends.” Generally publishers are very good about making the payments according to contracted schedules. The above situation is much more dire and is a good reason to have an agent who knows how and who to talk to inside the publishing house. There are ways to approach the situation that gets results, just remember, “Don’t Burn a Bridge.”

However, there are a few possible reasons that authors should keep in mind before getting impatient with a tardy paycheck.

It’s in the Mail

Many contracts give the publisher 30 days to make a payment. And some will take all 30 days to generate the check. Note that some organizations write checks on Fridays. And if they missed their post office cut off, the check won’t be mailed till the next Monday. Then it depends on the speed of the mail service in your area. There have literally been times too many to count where a client has called me impatiently awaiting their check…and the check arrived the next day. Please remember to consider holidays and mail travel times when marking your calendar.

Your Work is Not Yet Finished

Most contracts have a second advance payment due on the acceptance of a completed manuscript. The key word is “acceptance.” The is not the same as “delivery” of the manuscript. Instead it means the editor has to run the manuscript through its paces to determine that it is indeed the book you promised to write. A few publishers will not declare a book “acceptable” until the entire editorial process has been complete and the book is ready to send to the typesetters. This can be months after the book was originally delivered. (I recall one situation where a manuscript was delivered in April and the “acceptance” money did not arrive until November.

Why is this? Because the publisher should be able to know that what you have written is sellable. There is a famous 1996 case where Random House sued actress and author Joan Collins. The publisher attempted to make her pay back her $1.3 million advance alleging that the manuscripts she had delivered for two books were unpublishable. Collins won, and kept her money, because the original contract only said that the manuscript should be ‘complete’ – not satisfactory. Her agent had somehow convinced the publisher to allow that language in the contract! I can guarantee that mistake would not be repeated today….

Click to view a clip from the actual Joan Collins trial.
And here is a PDF of the actual Joan Collins contract.

The Editor Forgot to do the Paperwork

In my early days as an editor I was terrible about this. Since I was the one who would declare a manuscript “acceptable” it was up to me to generate the payment request. There were a few times where I simply forgot. I finally got smart and delegated the task. Once a book was past a certain point in the editorial process, our managing editor would create the paperwork and I would sign off. Problem solved. But because of that experience I keep tabs on this for our clients. A gentle nudge is usually sufficient to get things rolling.

Your Publisher May be Cash Poor

For some publishers (usually much smaller ones), cash flow trouble is a reality. Back in the heat of the economic crunch in 2009 a publisher wrote to tell me they did not have the money to pay an “on signing” payment. They had been hit by huge returns and the banks were not extending credit back then. (Read this blog post about returns and their negative affect on the economics of publishing.) The author and I appreciated being told and the humble way in which the news was given. The money did arrive within 30 days, tardy but it was all there. Fortunately that was a temporary thing and has not happened again.

If you are concerned, talk to your agent. In my opinion it is your agent’s job to pursue collections. And to pursue it in way that keep things professional and courteous.
Did this answer your question?

Who Gets Paid in Publishing?

October 10, 2011 in Business, Publishing, Steve, Writing with 16 Comments

by Steve Laube

With all the talk about Independent publishing vs. Traditional publishing and the talk about how writers can get rich if they follow a certain plan…I got to thinking. Maybe we should do a quick look at the Economics of Publishing to see if anyone is making off like a bandit. Sorry for you non-numbers people, but it is critical to understand the infrastructure (i.e. the lifeblood) that keeps your ideas in print.

The detective in the movie says “Follow the money,” so we shall. But first a disclaimer. These models are estimates based on years of reading contracts, profit and loss sheets, spreadsheets, and royalty statements. Your mileage may vary.

Follow the Money

Let start with a paperback book that retails for $15.00 and is projected to sell 10,00 copies the first year.

Expenses per book:

Trade Discount $8.25 55.0%
Print cost $1.25   8.3%
Royalty to Author $1.08   7.2%
Marketing/Publicity $1.00   6.7%
Publisher overhead $3.00 20.0%
Total Profit $0.42   2.8%

 

Explanation of each line item

Trade Discount  is the discount given to the retailer/wholesaler: $8.25 (I’m using a 55% discount as the average. This number can fluctuate wildly depending on the account which is buying the book.)

This leaves $6.75 for the publisher to work with. (also known as the Net Receipt)

Print cost: $1.25 (based on the cost to print a ten thousand 240 page books. Includes freight to the warehouse)

Royalty to author: $1.08 (based on a 16% of net royalty rate. On contracts that use a 7.5% or retail royalty this number would be $1.125)

Marketing/Publicity:  $1.00 (a wild guess that varies from book to book and author to author and where the money is spent. But in general conversations the publisher will look at a book’s first year sales projection and plan on $1 per book sold to determine the marketing budget.) This cost also includes any graphics design work for catalogs, advertisements, banner ads, etc.

Publisher overhead: $3.00. This is where they pay for the editorial work (content, copy, and proofreading edits); cover design; typesetting, warehouse, collections, sales team expense, telemarketing, accounting, legal fees, administration, etc.)

Five things to note:

1)      Ebooks only eliminate the print cost. There is still production costs which fall under the publisher overhead section.

2)      There is no mention of the cost of returned inventory for unsold books. I lump that into the Publisher overhead cost

3)      Many independent and maverick writers will be thrilled to read this saying “Whoopie! I can get rich because I not only keep the royalty, I keep the publisher overhead too!” And there is the rub. If the author can generate the sales and is willing to handle the infrastructure, then indie is a distinct possibility. But realize you are going into a business, not a hobby.

4)      Independents must face the fact that there are costs associated with creating a fine product. Nothing gets published for free. Even time costs money.

5)      Before you look at that 20% for the publisher overhead and start railing against the “money-grubbing” evildoers called “publishers,” stop for a moment. Would you say the same thing about a car dealership? (bad example) Or a dry cleaners? Or a bookstore chain called Borders? What about your own business? What about your church (ouch. You mean a church has expenses?).

Bigger Picture

If we create a cost analysis of the above model, except this time do it on the entire print run (multiplying everything by 10,000) we get the following profit and loss projection:

(Paperback book that retails for $15.00 and is projected to sell 10,00 copies the first year.)

Expenses (combined):

Trade Discount $82,500 55.0%
Print cost $12,500   8.3%
Royalty to Author $10,800   7.2%
Marketing/Publicity $10,000   6.7%
Publisher overhead $30,000 20.0%
Total Profit $    420   2.8%

 

Remember that model is for the first printing.

On a second printing there is no longer a cost for the cover design or editorial or typesetting. And even other costs become more efficient. So if a publisher is able to cover their cost on the first printing then they start making money. And the same efficiencies apply if this were an ebook. (And in this scenario, if the author had been given a $10,000 advance they would be getting a new check for an additional $800.)

But wait! Go back to that “Publisher Overhead” thingy again. Who gets paid out of that stash?

Editorial – $5,000 (again, a variable cost but if you consider hiring a high quality content editor like our own Karen Ball, a copy editor, and a proof reader or two, the cost will add up)
Cover Design – $2,500 (variable. I’ve seen cover designs cost $5,000. And if the designer is in-house then the cost is absorbed into general overhead.)
Typesetting – $500 (variable. Freelancers used to charge as much as $8 a page, but desktop publishing destroyed that price structure. But there is still a cost to have this done well. Have you bought an e-book that was formatted wrong? This is the place where those kind of errors can be fixed.)
Sales expense – $1,000 (if the publisher uses a commission based sales company then this number can vary. If it is in-house the cost to travel and manage an account properly is still the responsibility of the publisher.)
Warehouse – $1,500 (a wild guess because it is nearly impossible to do cost account per book against the cost of maintaining an entire warehouse. Usually that total cost is simply divided by the number of books in the warehouse.)
Admin., Legal, Accounting, I.T., Building Maintenance, Corporate Taxes, etc. – $19,500 The money to pay the rest of the infrastructure has to come from somewhere.

If there are any publisher types out there who read this and wish to chime in and verify or correct? Please do so!

 

Many Happy(?) Returns!

June 27, 2011 in Business, Contracts, Publishing, Steve with 11 Comments

by Steve Laube

Every first-time author is confronted by the reality of “Reserves Against Returns” as part of publishing economics. It is usually a shock and elicits a phone call to their agent crying “What happened to my money?”

Did you realize that book publishing is the only “hard goods” industry where the product sold by the supplier to a vendor can be returned? This does not happen with electronics, clothing, shoes, handbags, cars, tires…you name it. If it is a durable good the vendor who buys it, owns it (which is why there are Outlet Malls – to sell the remaining inventory). Except for books. Somewhere along the line the publishers agreed to allow stores to return unsold inventory for credit. In one sense, publishers are selling their books on consignment. Bargain books are actually resold by the publisher (after getting returns or to reduce overprinted inventory) to a new specialty bargain bookseller or division of a chain (which buys the bargain books non-returnable).

Consequently book contracts have a clause allowing the publisher to establish “a reasonable reserve against returns.” By “reserve” they mean a pool of money withheld from the author…holding that money in “reserve.” The intention of the clause is to protect the publisher against paying the author for books that have been shipped and billed to a store but may eventually be returned to the publisher.

Imagine if Walmart purchased 10,000 copies of your book. Everyone celebrates. If you are earning $1.00 in royalty (on average) for every book sold, that means you will receive $10,000 from your publisher at some point. Hooray! Steak dinners for every one!

But wait.

What if Walmart doesn’t sell all the copies they purchased and returned 5,000 of them?

And what if your publisher had already paid you for all 10,000 sold copies? That means your publisher overpaid you by $5,000. Do you have to give that money back? You really don’t want their collections agent (his name is Guido) to come to your door to get their money back.

Thus the publisher will make an estimate on every royalty statement and withhold a “reasonable reserve against returns.” It seems that some publishers abuse the word “reasonable.” One author I know had 70% of their revenue withheld for a complete royalty cycle because their publisher had made a big sale to a big box chain. But is that really abuse?

The Big Box retailers are notorious for returning over half of what they purchase.

I don’t begrudge a publisher for holding a reserve. I’d rather they not demand the money back later!

There was situation, many years ago, where an author’s book sold 8,000 copies to a single big-box retailer as part of the initial launch. Six months later, the author developed a new proposal and the editor was going to present it to the committee because the author had already sold 12,000 units (including the 8k to the big-box retailer). The day before the committee meeting the big-box retailer returned the books. All of them. All 8,000. The warehouse said it looked like the cases were untouched, in other words they never made it into the stores. Thus the author’s total sales went from 12k to 4k in one day. The editor walked into that committee meeting and was ambushed by the sales manager with this news. The publisher declined to contract a new deal. Author had to switch publishers.

The author was crushed, the publisher stunned, and everyone lost. So before we get all huffy with publishers and their accounting practices we have to realize that history tends to dictate accounting policy.

However, there is a practice regarding reserve against returns that is quite frustrating. There are some publishers that roll the reserve over every cycle….forever. No matter how old the book, if it is still in print, they hold back a reserve. And the new reserve they choose is suspiciously consistent to the amount the book had sold in the previous royalty accounting period. In other words the author never seems to get a respite because the reserve keeps rolling forward. This is just plain nasty.

If a publisher is savvy (and most are) they put that “reserve” in an interest bearing account. And they can sit on that float for six months earning interest on what is technically the author’s money. And if the returns do not use up the reserve the difference is credited back to the author. Let’s use the above example:

Books sells $10,000 worth of earnings in July-December.
Publisher creates a reserve of $5,000 in January in case there are returns after Christmas, so they only send the author $5,000.
In Jan-June there are $3,000 worth of returns sent back which is charged against that reserve.
So the publisher gives the author the $2,000 balance in their next check.
But the publisher, in essence, made some additional interest income on that $2,000 because that reserve sat in a bank for six months. Smart business!

Now all you accountants out there, please don’t criticize this example. I know there are new sales and new reserves and all sort of other nuances and the interest rates are currently pathetic (and therefore little incentive), but I’m trying to make a different point.

Therefore let me use real numbers for you. I won’t tell you who the publisher is, or what the book is, or how many copies were sold to generate the numbers. You won’t be able to guess, so please don’t try. These numbers are taken from an author’s last two actual royalty statements to show you what I’m illustrating. I can tell you that the author’s book was published more than three years ago… And publisher is still withholding returns each cycle.

Statement A (first six months)
Royalty earnings from Sales – $941
Reserves withheld in previous cycle credited back to Author – $940
Reserves withheld this cycle – $626

Total Earnings this cycle – $1,255  ($941+$940-$626)

Statement B (second six months)
Royalty earnings from Sales – $825
Reserves withheld in previous cycle credited back to Author  - $626
Reserves withheld this cycle – $688

Total Earnings this cycle – $763

The publisher has kept about $600 of the author’s money in their “reserve” pocket in case there is a return, for a full year. But if this were multiplied across every title in this publisher’s warehouse think of the amount of that reserve. If they have 5,000 titles in their warehouse and they are only floating a reserve average of $400 per title, they are earning interest on two million dollars. (At 2% that is $40,000 in earned interest.)

Again, I do not begrudge the publisher of the necessity of withholding a reserve. But when it starts to appear to be a form of clever accounting I get a little testy.

My preference would be to have a clause in the contract under the Reserve Against Returns section to read:

Publisher has the right to reserve for anticipated future returns. Reserves are never established to avoid paying royalties, but to eliminate the situation where royalties might be paid out on sales that are ultimately reversed. Such reserves will be used only when the publisher is aware that inventories exist in the marketplace that are not selling through and will likely be returned. Reserves are not limited to a certain percentage of sales, but in all cases must be defensible by the publisher.

Agents can dream too, can’t they?

By they way? Lest you think I’m ignoring the E-elephant in the room? Ebooks technically do not have returns since there is no physical inventory on a shelf to handle. Consequently there should never be a reserve against returns on e-books. But I’m still trying to track down the oddity of a recent royalty statement where the author had negative 3,000 e-books sold. How can you unsell 3,000 e-books? Yes, you can return an e-book bought by mistake on Amazon. I’ve done it to see if it is possible. It is. But all that does is counter the sale made the day before. So to have thousands of returns boggles the mind. Even the accountants are flummoxed. Maybe I’ll tell you the rest of that story when the mystery is solved.

For a brilliant discussion about other implications of returns take a look at this post by Mike Shatzkin and Michael Cader.

 

 

 

 

 

 

 

 

The Myth of the Unearned Advance

June 13, 2011 in Business, Publishing, Steve, Writing with 43 Comments

by Steve Laube

A common myth permeating the industry is that a book is not profitable if the author’s advance does not earn out. I would like to attempt to dispel this myth.

First let’s define the term “Advance.” When a book contract is created between a publisher and an author, the author is usually paid an advance. This is like getting an advance against your allowance when you were a kid. It isn’t an amount that is in addition to any future earnings from the sale of the book. Instead, like that allowance, it is money paid in advance against all future royalties, and it must therefore be covered by royalty revenue (i.e. earned out) before any new royalty earnings are paid.

The advance is usually determined by a series of assumptions that the publisher makes with regard to the projected performance of each title. The publisher hopes/plans that the book will earn enough royalty revenue to cover the advance within the first year of sales.

A NY Times essay a couple years ago casually claimed “the fact that 7 out of 10 titles do not earn back their advance.” Of course they did not cite a source for that “fact.” But I have seen it quoted so often is must be true! (and it isn’t.) The implication then is that a book isn’t profitable if it doesn’t earn out its advance. The publisher overpaid and has lost money. The author is the happy camper who is counting their cash gleefully celebrating the failure of their publisher to project sales correctly.

Let me try to explain why that isn’t always true. And to do so means we have to do math together. This may be a little complicated, but realize that these calculations are critical and each publisher runs these kind of scenarios on your books. To dismiss this conversation and claim you “don’t do math” is to ignore the lifeblood of your profession.

Realize that this is a generic model. Each and every number below fluctuates from title to title. That is the weakness of the exercise, but bear with me.

Assumptions:

Advance paid to author: $10,000
Retail price: $13.00 (paperback)
Net price: $6.50 (this is what the publisher receives when they sell the book – to dealers, big box retailers, distributors, etc. )
Copies sold: 10,000

Scenario one: Author earns 14% of net for each book sold. ($6.50 net x 14% royalty x 10,000 sold)
Thus, after selling 10,000 copies the author has earned $9,100.
Leaving $900 of the advance unearned.

Scenario two: Author earns 16% of net for each book sold ($6.50 net x 16% royalty x 10,000 sold)
Thus, after selling 10,000 copies the author has earned $10,400.
The publisher writes a royalty check to the author for $400. The amount above the original advance.

The myth says that scenario one equates a failed and unprofitable book , while scenario two is a profitable book.
But wait! Let’s do some more math.

New Assumptions. (remember these are all estimates based solely on this scenario.)

BOTH scenarios have the publisher making the same amount of revenue. ($6.50 net x 10,000 sold.) Both scenarios generated $65,000 in net revenue for the publisher.

To determine profitability we have to subtract costs.

Fixed costs

Editorial expense: $8,000 (includes all stages of the editorial process)
Design (typesetting/cover): $4,000
Printing and warehousing:  $15,000 (the approximate cost of printing 12,000 copies)
Marketing and PR: $10,000 (an average of $1 per book)
Administrative costs: $13,000 (20% of the net revenue)
Advance paid to author: $10,000
TOTAL COSTS: $60,000

Profit for the Publisher: $5,000 (or 7.7% of revenue before tax)
or the $65,000 in revenue minus the $60,000 of total costs.

Are you with me so far?

Now watch this.

Scenario one – (with the unearned advance still on the books) has a profit of $5,000 for the publisher.

Scenario two – (pays the author $400 for earnings beyond the advance) has a profit of $4,600 for the publisher.

In this comparison it is the book that didn’t earn out the advance that actually makes more money for the publisher!

Why? Because scenario one pays a lower royalty per book sold. The advance itself has NOTHING to do with it. The advance is a fixed cost that is covered by the revenue generated by the publisher.

_____

Pause and reflect on that for a moment.

_____

The advance is a cost of acquisition. If that cost of acquisition in the above scenario were $50,000 of course neither scenario would have been profitable because sales would not have been enough to cover all the costs. And it is likely, if there was a $50,000 advance, the publisher would have spent more on marketing and PR.

So this is not an argument for bigger advances. Instead it is an attempt to show, albeit using controlled statistics, that an unearned advance does not necessarily equate the failure of a book!

So when is a book profitable if there is a bigger advance?

Let me do one more set of numbers to illustrate:

Assumptions:

Advance paid to author: $75,000
Retail price: $13.00 (paperback)
Net price: $6.50
Copies sold: 45,000
TOTAL REVENUE ($6.50 net x 45,000 sold.) = $292,500.

Fixed costs

Editorial expense: $8,000
Design (typesetting/cover): $4,000
Printing and warehousing:  $55,000 (the approximate cost of printing 50,000 copies)
Marketing and PR: $75,000
Administrative costs: $58,500 (20% of the net revenue)
Advance paid to author: $75,000
TOTAL COSTS: $275,500

Profit for the Publisher: $17,000 (or 5.8% of revenue before tax)

If you are an experienced person from the publishing side of the table it is obvious that this is a very generic scenario that has only an echo of reality. For example, the net revenue for a publisher is usually less than the 50% of retail that I used above. That is because distributors and specialty vendors (like the book racks you see in the airport) command a much higher discount off the retail. Thus the true picture is highly complex. And we don’t even touch on ebooks or ebook sales or royalties here. This exercise is merely to show a business model where the advance is a fixed cost. Not a cost that has to be earned out for the book to be profitable.

In the above case, a book with a $75,000 advance makes money after only 45,000 copies are sold.

So what do you think? Is the math realistic? Does it make sense? What are the implications (either to the publisher or the author)?

 

 

 

 

 

 

 

Tell No Secrets

February 22, 2011 in Business, Publishing with 8 Comments

How much should author friends reveal to each other about contracts or other business dealings when they have business with the same publisher?

I think it is a huge mistake to reveal the amount of your advances to other authors. This is similar to finding out the salary of the co-worker in the office cubicle next to yours. When I was a retail store manager we had major problems when salaries were revealed, a near fist-fight between two people who had been friends.

Money is viewed as a measure of worth; i.e. a measure of the worthiness of your work. Consequently if you contract for a $5,000 advance with AlphaGammaDelta publisher and a month later, your best writing friend, who is at the same stage in her career as you are, contracts for a $8,000 advance with the same publisher for a similar project…what is your reaction? Sure, at first, it is excitement and joy for your friend. But later, in private, you will naturally begin to wonder about your publisher’s commitment to you. You think, “They must like Sally better than me!” Jealousy and bitterness can set in.

I’m not saying that this will happen to you, but I caution you with every ounce of my being, be very careful about ever revealing monetary details of a book contract with anyone. It can become a form of gossip that does no one any good. I know of an e-mail trail among authors that was very free with this kind of information and consequently there is tension towards a particular publisher for not paying everyone the same. This is unreasonable and unfair…and doesn’t help anyone.

In my years as an editor and now as an agent I’ve seen contracts land all over the board. The timing of a publisher’s economic situation and certain management directives can change quarterly (even weekly!). The relationship the author has with the publisher, the relationship the agent has with the publisher, the perception of value that the publisher has of a project…They all influence each situation uniquely.

But we tend to compare contracts as if all contracts are equal. Trust me, they are not.

Of course I’m speaking specifically about contracts here. There are professional people who can help you determine if your deal is a good one. Or you can simply trust your agent….!!!