Q&A: Royalties

Tell me about royalties in book contracts.

A.  Royalty rates may vary wildly in the contemporary book publishing industry; however, typical hardcover rates are 10% – 15%, with “break points” that escalate the royalty as more copies are sold; e.g. 10% on the first 5,000 copies, 12 1/2% on the next 5,000, and 15% thereafter.  Mass market paperbacks generally have between a 6% and 9% royalty, sometimes at a “flat” rate without break points. Trade paperbacks (large format) formerly carried the same royalty rate as hardcover, but unfortunately this no longer is true.  Many of the big publishers, such as Simon & Schuster, now give trade paperback the same royalty range as mass market.

More important than the percentage amount, however, is what the percentage is based upon.  Fiction publishers generally use an author-friendly list or cover price formula, with some major exceptions, like Sourcebooks, which uses a “net receipts” formula.  This formula is based on the publisher’s actual receipts after discounts, rather than the cover price.   Under such a formula, you will receive less royalties – often half as much — as a “cover price” author would receive from the same amount of sales.

The deep discount.  Most publishing agreements provide that an author’s royalty is reduced for certain “discounted” sales — sales at greater than the publisher’s “normal wholesale discount” or  “greater than a 50% discount.”  The reduced royalty rate for deep-discount sales may be either one-half the stipulated royalty or a percentage (7 percent to 10 percent) of the publisher’s net receipts.  Originally, this clause was meant to apply to non-returnable quantity special sales that a publisher made at a high discount to purchasers outside normal book-purchasing channels (such as premium sales, export sales, direct-mail sales, or sales on a non-returnable basis).  But guess what? Many publishers now apply the clause to normal bookstore and wholesale sales.  Since many –sometimes most– books are sold to bookstores and to Amazon at a discount rate of 55 percent, and to big discounters like Wal-Mart, Target, and clubs like Costco, at over 65%, this clause in effect guarantees that the author’s royalty rate always will be reduced.  (Discounts also can be considerably greater for mass market paperbacks, e.g., 60 to 65%.)

The solution?  Some writers and agents request a copy of the publisher’s current discount schedule before agreeing to royalty schedules – but the publisher can change the schedule.  Instead, try to increase the percentage above which your royalties reduce, the higher the better.  In the example above,  changing the percentage to 56% would protect you from a reduction for sales to Amazon and some of the bookstore chains, but not from the big discounters.  A better alternative is making sure the clause only applies to its original purpose – “special” sales.  To do this, add language to your discount clause specifying that your publisher will be able to apply the reduced royalty rate only to “sales outside normal wholesale and retail trade bookselling channels.”

Q.      Tell me about royalties for subsidiary rights.

Authors (and even agents) sometimes overlook subsidiary rights royalty clauses.  This can be a big mistake; significant revenue can be derived from such rights.  First, a definition:  Subsidiary rights (often called “subrights) are any right to use content from your work that is subsidiary to the primary right of print publication, including magazine articles, film and video, audio, foreign sales and translations, DVDs, book clubs, electronic rights, reprints, merchandising, etc.  Any rights which you have not retained may be exploited by your publisher, either by itself (the big publishers usually have their own audio and electronic publishing divisions), or by licensing the rights to other companies.

If your publisher exploits subrights itself, you should expect a percentage royalty, just as with your print rights.  The amount of such royalty and what it is based on (net receipts vs. list price, see my previous Q&A about royalties) always should be reviewed.  Typically publishers will insist on net receipts AND a flat royalty rate (e.g. 10% for electronic or print-on-demand, although the cost of production is lower than print).  Don’t be afraid to negotiate these terms.

For subrights such as foreign, film, or audio rights retained by the publisher and licensed to a third party, the standard royalty to the author is one-half of the net receipts from such licenses, with some exceptions.  (For example, first serial rights should be 90% to the author, 10% to the publisher.)  It therefore is critical to define “net receipts” carefully to eliminate any creative bookkeeping by the Publisher.  Ideally, the definition should be this simple: “Net Receipts” refers to all funds received by the Publisher for the sale or license of the Work.”

For all subrights, the author should insist that advances received by the publisher from the licensee also are split, and further require that the author’s share of any advance received by the publisher for a subrights license be remitted to the author within thirty days of receipt.

Publishing agreements also often have “special categories” of subrights – basically ways to cut the author’s royalties further.  For example, book club rights – in many agreements, an author’s share of royalties on sales to a book club is not the standard one-half of net receipts, but instead a percentage of the author’s normal print royalty rate (often 50%).  The theory behind this is that the publisher is receiving from the book club publisher a lower rate than from bookstore sales.  This is true, but on the other hand, the publisher has no costs, either – the book club publisher prints and markets its own edition.  And in some cases, the book club publisher is actually owned or controlled by your publisher!  Therefore always try to get book club rights included with the other licensing subrights – you then will receive one-half of the publisher’s net receipts instead of a small royalty.

Subsidiary rights royalty clauses should never be ignored; make sure you understand what you are giving up and what you are gaining, and don’t be afraid to negotiate.