A few years ago, the topic of the digital royalty rate came up at nearly every publishing conference. Agents and authors often raised the issue, complaining that the standing rate of 25% on frontlist titles was too low. (Standard royalty rates in the industry vary by format and, as of this writing, are 15% on hardcover; 7.5% on trade paperback; and 8–10% on mass market.) The friction over the digital royalty rate—with authors and agents demanding that it be raised and publishers remaining silent (while refusing to move it)—was a constant. Then the issue seemed to die. So, have authors and agents simply acquiesced? After talking to a number of insiders, PW found that many are still unhappy with the rate, even if they don’t see it moving anytime soon.
The Authors Guild has been one of the most vocal proponents of increasing the rate. In 2011, expressing its standard position on the issue, the Guild wrote, in a blog post on its Web site, that publishers’ “resistance” to raising the rate would be “in the long run, futile.” The post, which was unsubtly titled “E-book Royalty Math: The House Always Wins,” closed with this prophecy: “The tipping point will likely be at hand.”
That tipping point, however, never came. Paul Aiken, the executive director of the Guild, told PW that, unfortunately, “there’s a lot of inertia built into the system.” The inertia that Aiken refers to—which many agents, most of whom spoke to PW off the record, also cited—is caused by the fact that many old contracts have clauses stating that an author will receive a higher e-book royalty rate if, and when, the standard rate changes. (While publishers won’t discuss individual contracts, they all have boilerplate terms which, generally, appear in all their contracts. Those terms can be modified through a period of contract negotiation.) This means that if a shift occurs, publishers will have to start paying the higher rate to authors already under contract, in addition to the new authors they sign up. It is, as Aiken noted, “a strong incentive for publishers not to fairly pay authors for e-book sales.”
The major houses, as a rule, do not discuss royalty rates—a number of Big Five houses contacted for this piece declined to comment—but insiders noted that some editors (and a few executives), when speaking candidly, have acknowledged that the digital royalty rate needs to be increased. Nonetheless, in the years since the issue became a hot-button one within the industry, the rate has stayed firmly at 25%. One way publishers have been successful at keeping the rate where they want, sources said, is by paying their biggest authors more money.
With self-publishing platforms and independent digital publishers offering e-book royalty rates as high as 70%, many in the industry assumed that the major houses would have to raise their digital royalty rate to prevent their biggest authors from jumping ship and self-publishing. But that exodus has not happened. Why? Because the houses have accommodated their most important authors with ever-larger advances. (Big houses are also offering other financial incentives to top authors, though sources declined to offer specifics on these.)
By finding ways to keep their top authors in-house without raising the e-book royalty rate above 25%, the big houses have, in effect, killed the debate. And this comes at a time when most publishers’ profits have improved because of e-books. Richard Curtis, a literary agent and founder of the e-book publisher E-Reads, repeated an oft-said refrain when he noted that “the 25% [e-book royalty] rate has been the chief cause of publishers’ return to prosperity.”
The question of how 25% became the standard rate, and why that particular number stuck, is not easily answered. Curtis said he thinks that “once publishers discovered that those rates gave them a comfortable return, they settled on them.” The Authors Guild said that 50% was initially the standard digital royalty rate, and it has long held that this is a fair rate. According to the Guild, Random House’s standard digital royalty was, in fact, 50% of net proceeds from November 2000 through June 2004. (Random House, when asked to verify this assertion, declined to comment.) It’s important to note, however, that from 2000 through 2004, the e-book market was almost nonexistent; Amazon did not introduce the Kindle (the first e-reading device to gain market share) until 2007.
Sources seemed doubtful that the digital royalty rate would change any time soon; few offered specific predictions and most scoffed when asked if they anticipated movement in 2014. The larger question of what constitutes a fair rate also remains unanswered. As noted, the Guild cites 50% as the desired figure. But some insiders acknowledged that this rate is unrealistic, and therefore should not be held up as a hoped-for standard. After all, the standard royalty rate on trade paperbacks (which, until e-books entered the market, were the cheaper alternative to hardcovers) looms around 7.5%.
Some of those who would like to see the digital royalty rate increase, but feel that 50% is an unrealistic target, point to the fact that the current rate was established before the industry had any knowledge of how large—and profitable—the e-book market would become. As one insider explained: “The problem is that [agents and authors] don’t know what to ask for, and publishers don’t know what to give.”