Mike Shatzkin has another long and thoughtful post, this time arguing that publishers should change the accounting methods they use in order to pay authors more for sales of e-books. At the moment, publishers count the 70% of e-book cover price they keep under the agency model as their revenue, and pay authors a percentage of that revenue. If authors are paid a 25% royalty, for instance, 25% of the 70% works out to 17.5% of the e-book’s cover price.

Shatzkin argues that publishers should instead call the whole price revenue, and account for the 30% as a “cost of sale” (like the costs of printing, shipping, storage, etc. for paper books). He makes several arguments in favor of this change.

For one, it would boost publishers’ revenue figures, which would cause less overall worry as the proportion of the market taken up by e-books grows. It also makes their margin on e-books look more reasonable and reduce the amount of chiseling that agents or retailers are inclined to want to do, and it could make publishers look better to anti-trust investigators from an accounting perspective.

Another reason for the change is that it would let publishers pay authors more, which makes publishers more competitive against Amazon’s self-publishing rates. Shatzkin points out that publishers don’t have to match Amazon’s rates if the other services they can provide that Amazon doesn’t (editing, marketing, etc.) are perceived as making up the gap—but right now, the gap seems bigger than those benefits can close.

Shatzkin sums up his advice to publishers at the end:

1. Change the way you account for ebook sales in the way Michael Cader suggests: call the consumer payment the top line revenue and the payment to the retailer a cost of sale.

2. Recognize that no excess margin will go unpunished. The forces of big author agents and powerful retail channels will assure that. You know there’s a minimum margin you need to survive; in fact there will also be a maximum margin you’ll have any prayer of holding onto.

3. Pay authors more so you can pay retailers less. There will be a direct connection between the two.

It does seem like a good idea for publishers to offer better deals to authors. As Shatzkin points out early in the post, if publishers lose bookstores they have to find somewhere else to sell their books—but if they lose authors, they don’t have any books to sell.


  1. I’ve been thinking the BPHs ebook accounting is just begging for a lawsuit from a disgruntled author. After all, under the “Agency Model” Price Fix, the publisher is supposed to be the seller, with the retailer being just an agent for the sale. So one would expect that the royalties be based off the price the publisher charges.
    By basing royalties off their 70% cut, the BPHs are acting as if they were wholesale-ing the books to the retailers and their 30% cut were a retailer markup.
    Seems to me they are having it both ways: using one accounting model to charge consumers and a different model to pay authors.

    This is coming back to bite’em, soon.
    Maybe Mr Stross should take another look at his publisher’s accounting practices instead of focusing on the DRM bugaboo. 🙂

  2. Mike essentially wants to fix the books so that publishers ‘look’ better, and the royalties they pay ‘look’ higher …. ?

    “call the consumer payment the top line revenue and the payment to the retailer a cost of sale.”

    As someone who has been in Financial Accounts for 30+ years in Europe, I find this quite bizarre.

    Companies cannot just ‘change’ how they calculate their earnings/income. Either it is their income or it isn’t.

    The fact is that the price a consumer pays to the online seller (Amazon?) is the revenue of the seller. It is NOT the revenue of the publisher.

    The revenue of the Publisher … is what they actually receive ! That is why it is called their revenue!

    Let’s say I sell apples to the corner grocery store for €1 and he sells them to consumers for €3. I cannot then just choose to list my sales as €3, with a balancing cost of €2 described as “retailers cut”. Who came up with this crazy stunt ? Can Mike really be that uninformed ?

    This is a proposal for a totally false accounting manipulation that would create a complete false financial picture of the business.

  3. > This is a proposal for a totally false accounting manipulation that would create a
    > complete false financial picture of the business.

    If Amazon is in fact an agent of the publisher rather than a retailer in this case, then the income is entirely the publishers with a commission paid to the agent. They don’t want to say this to the authors because the royalties are based on publisher revenue. I suspect some authors are going to have to go to court to get the royalties they are due. It seems some publishers are too used to being able to play fast and loose with their accounting and having authors not able to audit it.

  4. @Howard: If the “Agency Model” isn’t, then the Antitrust guys likely have an open-and-shut case.

    The BPHs can’t have it both ways.
    Either they’re wholesale-ing the ebooks to retailers and carteling to keep the price fixed, in which case their revenue is the 70% number, or they’re the actual seller and the 30% commission to the retailer is an operational cost of the Publisher and they are shortchanging authors.

    They’re paying the authors for ebook sales as if the sale price-minus retailer commision price were a wholesale price. If that doesn’t change, the case for carteling becomes a lot stronger since you’ll have Six Publishers agreeing on identical wholesale terms and enforceing identical markups.

    As often pointed out: any *one* publisher doing this may or not pass legal muster but all six acting in concert? Textbook definition of a cartel.

    At this point the BPHs have painted themselves into a corner; they either calculate ebook royalties by true Agency Model terms or they try to sweet talk the trustbusters.
    It may be cheaper to pay the authors which, as Shatkin is pointing out, is something they’re going to have to do anyway.

  5. Felix – I disagree again 🙂 there is no connection in my view.

    One, Mike’s suggestion, is a question of Agency as an accounting definition. The other is about anti competitive practices and fixing price.

    There is no question my view that they are involved in cartel price fixing. But that does not necessarily add up to qualifying as Agents for reporting of income etc.

  6. I’d suggest these authors tell their publishers to go get a hair cut and move toward self-publishing. They may take a pay cut as well but as books move ever closer to being totally digital they will be able to offer their content for far cheaper than through a traditional publisher and at the same time make more money per copy sold that they ever did with that publisher.

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