Publishing industry veteran and consultant Mike Shatzkin weighs in on the agency royalty mess I mentioned a little while ago. He elaborates on what Brian DeFiore said about how the most successful authors are largely exempt from this, because their advances are calculated to come out to more money than their expected sales should generate, and discusses the agent community reaction to these revelations.

The publishing industry is facing a hardscrabble battle with retailers for profit margins on book sales—since the less money the publisher makes, the more the store can make, and vice versa. Lest you thought Amazon was the only one who had playground fighting matches with publishers over contract terms, Barnes & Noble has been engaged in a margin dispute with Simon & Schuster, right down to an Amazon-like reduction in S&S books carried in B&N stores, for several months now. And, of course, the whole problem with Amazon’s $9.99 price was that publishers feared Amazon would get tired of negative margins and seek to impose them on the publishers instead.

Publishers, Shatzkin points out, are facing a crunch when it comes to reducing the overhead required from print publishing in light of print’s declining numbers. The problem is that there are a number of fixed costs, such as typesetting, that remain the same whether you’re printing ten books or ten thousand. And factoring in lower quantities of returns doesn’t help when the publishers own their own warehouses, so they don’t save that much money on storing those books either.

In fact, it would appear that returns may have declined more than print sales have, and even more drastically as a percentage of overall sales since ebooks don’t get returned at all. All of this has been good for publisher profitability. In fact, seeing the data we see now, one might wonder whether the publishers were being self-destructive when they went through great gyrations (including everything that landed them in the lawsuit Apple just finished for them all alone and which was expensive for them to settle) to preserve print sales at the expense of ebooks. They tried windowing — withholding the ebook from the market for a while — and then, famously since the DoJ involvement, maintaining somewhat higher prices on ebooks at retail.

But the thing is, Shatzkin points out, putting books on shelves is the most important thing publishers do. It’s the only thing they can do that self-publishers can’t as well—and when the need for books on shelves goes away, publishers start seeming a lot less appealing when it’s easy enough for authors to publish themselves electronically. And as those higher-royalty print sales go away, authors are going to start wanting a bigger piece of the digital pie.

Shatzkin suggests publishers need to raise author royalties, and authors and agents might look toward a flat per-book fee rather than a percentage of a price that can fluctuate wildly. He’s been suggesting boosting royalties for a while, but the DoJ case made it hard for publishers to make any major changes. With that largely out of the way, he suggests, perhaps they can get around to it.

In closing, Shatzkin suggests “the incumbent management of the big publishers is damn smart and has managed a very tricky transition extremely effectively.” I suppose I can agree with him insofar as the publishers still currently exist and haven’t gone bankrupt yet, but I’d question just how much of that effectiveness is due to their management and how much is in spite of it.

Amazon basically built the e-book market all by itself, after publishers had a whole decade in which they couldn’t e-book their way out of a paper bag. Amazon took initiative to sell at the magic $9.99 price, which had a psychological appeal to consumers far out of proportion to even $1 more. Publishers would have preferred higher prices, but who would have shelled out hundreds of bucks for an e-reader just to pay the same for an e-book as for a hardcover? Amazon broke the chicken-or-the-egg consumer reluctance barrier…and agency pricing was the thanks they got. (Yeah, those publishers have “damn smart” management—that had the bright idea to aggro the Justice Department. Good thinking there, guys.)

Whatever happens now, after the Justice Department suits shake down and as print’s relevance dwindles, it’s going to be a brave new world for publishing. Maybe the publishers will finally start innovating, who knows. One thing’s for sure: the next ten years are going to be very interesting.


  1. I’d suggest another problem the major publishers face. When Oprah first began promoting books, I’m told, she thought she could feature little known authors from small publishers. She soon discovered that she could create far more demand in a few days than those publishers could meet in months. In the print world, only big publishers can manage big sales.

    That’s not true with digital. When I release My Nights with Leukemia in a couple of weeks, it’ll take a little over a week for print and digital versions to be available almost everywhere in the world. That’s impressive. But sales of the print versions will always be limited by the rate at which Lightning Source and CreateSpace’s print-on-demand machines can print them out.

    Digital has no such limitations. If Oprah were to promote my book on a Friday, the same day I send the files for the digital version to Amazon, then Amazon would probably make it available for sale on Saturday morning. (Amazon is fast.) Their retail system and servers could easily handle selling a million copies that Saturday alone. That’s zero sales to a million sales in 48 hours by a little, two-Mac publisher in a four-room 1920s Seattle apartment.

    And yes, there are other limits that are just as critical. While Oprah really should promote my Hospital Gowns and Other Embarrassments, written for millions of teen girls, My Nights with Leukemia is written primarily for nursing students and nurses, a much more limited audience. (It describes my experience caring for children with leukemia.) And unlike a major publisher, I don’t have money to promote it. I certainly hope it sells in the thousands, a number print-on-demand can easily handle. But it will never sell in the millions.

    That said, it does matter that for production and distribution the digital world is a level playing field. It benefits not only from technological change but from the fact that sales and distribution are handled by third-party retailers. Amazon and Apple could care less if the ebooks they sell come from the Big Six or the Little Six Thousand. In physical stores B&N does care. I’m sure they find much easier to work with major publishers with large advertising budgets than with little me and no such budget.

    It is true that the Big Six might have pioneered digital marketing themselves, creating their own ecosystem with online stores, readers and apps. But numerous factors made that unlikely.

    * They lacked the technical savvy to do so. Amazon and Apple had skills they lacked.

    * Any move they made in concert might have met with federal anti-trust scrutiny, as has happened with agency pricing.

    * Being the ones leading the move to digital, would have meant they were the ones provoking the anger of bookstores rather than Amazon. Angering your primary customers isn’t good business.

    Think back a century. Buggy manufacturers who didn’t begin to make cars were in serious problem. Their core business was dying and few of the skills it took to make a buggy were adaptable to making cars. That’s not the situation that existed in 1970s when the Big Three automakers found themselves in heavy competition with foreign automakers who knew how to make cars that got better gas mileage. Their core business remained the same. They merely needed to adapt to making a different kind of car.

    The major book publishers are in a situation that’s far more like the automakers of the 1970s than the buggy makers of 1900. Their core business–locating authors, creating, editing and promoting books–remains unchanged. It’s the fringes of their business–printing, warehousing and distributing books–that’s shrinking, much like the sales of large, gas-guzzling cars did in the 1970s. That’s what’s left them confused and stumbling about.

    I know. I’ve been doing some stumbling myself as I adapt to digital. I’d still be in serious trouble if Adobe wasn’t so committed to making InDesign handle both digital and print outputs well. As one guy, I simply don’t have the time to master ePub coding.

    –Michael W. Perry, Inkling Books, Seattle

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