BY:Neil J. Rosini, Michael I. Rudell
(As originally published in the Entertainment Law column in the New York Law Journal, Friday, August 27, 2010)
Three recent announcements involving electronic publishing have sent ripples through the publishing industry.
The first was Amazon’s announcement that its sales of e-book units exceeded its sales of hardcovers in the second quarter, a trend that reportedly continued in July. Although comparative sales figures do not present a complete picture, it is clear that gateway companies such as Amazon, Apple, Sony, and Barnes & Noble, that sell both e-books and proprietary e-book reading devices are enlarging their share of the publishing marketplace. (This article will refer to them as “Digital Distributors” even though “distributor” can be a misnomer; see below).
The second, also in July, was that Odyssey Books, the new publishing arm of The Wylie Agency, agreed to make available in electronic form twenty titles, including modern classics by A-list authors and their estates that The Wylie Agency represents, exclusively for a two-year term through Amazon’s “Kindle Store,” which services its Kindle reading device. This approach bypassed not only the traditional conduits of literary works – book publishers – but also every Digital Distributor but one. Even physical bookstores reportedly were excluded from selling some of the books, which would only be available in Odyssey electronic editions.1 Outraged responses followed from Digital Distributors other than Amazon and from book publishers, including Random House, which asserted e-book rights in most of the titles in question through earlier print publishing contracts. The Authors Guild also expressed concern over the grant of exclusivity to Amazon, even though the authors’ shares of e-book revenues under the Wylie arrangement would be much larger than the current norm.
The third announcement came three days ago when Wylie/Odyssey and Random House declared that the Odyssey-Amazon deal had been scaled back –apparently to seven books — and that Random House rather than Odyssey would distribute the “disputed titles” through more Digital Distributors than one.
The rapid growth in e-book sales and the increasing number of options available to authors for digital distribution of their works, as illustrated by these events, are altering the traditional business model of print publishers. These developments also underscore that the size of the authors’ shares and traditional publishers’ shares (if any) of e-book sales revenues may depend on where the Digital Distributors obtain their rights to sell e-books: from traditional print publishers, which of necessity are becoming increasingly focused on e-book sales, or from new publishers specializing in e-books, or even from the authors themselves.
As useful background to the implications for authors and publishers of the Amazon, Wylie and Wylie-Random House announcements, it is worth examining recent developments in e-book pricing and authors’ royalties.
Until recently, most publishers sold e-book rights to a Digital Distributor such as Amazon, which in Amazon’s case then offered e-books to the public through its dedicated Kindle device as a distributor/retailer. A publisher that offered a hardcover book for the suggested retail price of $25.99 would sell the e-book version to Amazon/Kindle for approximately $13. Amazon, acting as retailer, established the e-book price, which for many bestsellers was $9.99, and accordingly, Amazon lost about $3 on each transaction. Amazon’s goals included selling more Kindle devices and establishing a strong foothold in the e-book market.
From a financial perspective, most publishers were comfortable receiving $13 for each e-book, 50% of the suggested hardcover retail price being the sum they generally received from sales of hardcover versions. On the other hand, publishers grew concerned about their lack of control over the selling price of the e-book and that a $9.99 retail price for an e-book edition released at or about the date of hardcover publication lessened the public perception of the value of the hardcover edition. Concern also was raised over Amazon’s increasing dominance in the e-book market, acquired in part by selling e-books at less than cost.
In an attempt to control the price at which e-books were sold, five of the major publishers, with the notable exception of Random House, established an “agency model” with Digital Distributors including Amazon.2 The Digital Distributor now was deemed to act as the agent of the publisher, retaining a 30% share of the retail price instead of acting as a distributor-retailer that set the price itself. Under the “agency model,” the publisher, not the Digital Distributor, set the price of the e-book edition. What emerged was a selling price of $12.99 to $14.99 for most e-book editions sold through the Digital Distributor and $14.99 to $16.99 for enhanced e-book editions — considerably less than the suggested retail price of hardcover editions but a good deal more than $9.99.
With Amazon acting as agent and a retail price of $12.99, the publisher would receive $9.09 for each e-book edition sold (70% of $12.99) rather than the $13 it received in the example above when Amazon acted as a wholesale buyer and retail seller of the e-book edition. The publishers accepted this loss of revenue, aware that Amazon’s $3 deficit per book was not indefinitely sustainable and fearful that over time, Amazon would gain a strong enough market position to refuse to pay $13 per book and offer a much lower payment in its place. By adopting the “agency model” and controlling the price at which e-books were sold, publishers would support the perceived value of physical books (while helping to protect the physical stores that sell them) and preserve a diverse e-book marketplace with pricing they could accept.
The price at which e-books are sold and the amounts collected by publishers in most instances affect the amounts authors receive from e-book sales. Several years ago, some publishers agreed to pay authors 50% of the publishers’ e-book receipts, but in recent years the standard amount offered by most publishers descended to 25% where it stands today.
In dollar terms, assuming a $13.00 wholesale price paid by Amazon for an e-book, those authors who received 50% of the publisher’s net receipts before the “agency model” were credited with $6.50 per unit sold. By way of comparison to hardcover sales, authors typically are credited with 10-15% of a $25.99 cover retail price – i.e., $2.60-$3.90. When the author’s share from the sale of an e-book became standardized at 25% of the publisher’s receipts — still prior to the “agency model” — the author’s payment per e-book was $3.25 per unit sold, again assuming the publisher received $13.00 at wholesale per e-book. When the “agency model” was adopted by most of the major publishers, an e-book that Amazon sold at retail for $12.99 netted the publisher $9.09 (see above), and the author’s 25% share of that comes to $2.27.
Agents and authors consider the division less than justified and “contrary to the long-standing practice of authors and publishers to, effectively, split evenly the net proceeds of book sales,” as the Authors Guild recently put it. They point out that publishers avoid costs of manufacture and shipping in regard to e-books, that the costs they do incur are primarily from digitizing and formatting text which generally run less than $1,000 per book, and that there are no costs involved in the returns of books as there are in distribution of physical books. On that basis, authors look to share in at least 50% of what the publishers receive — perhaps more — and have been seeking ways to do that.
Publishers respond by noting that they have spent years on researching and developing e-book technology, that they have helped developed the author’s career, that warehousing numerous physical copies of the author’s books is expensive, and that they need a disproportionately large share of e-book revenues to remain viable in a difficult economic climate.
The choices open to authors in a practical sense depend on several factors. Unpublished authors who wish to see their books offered through a major publishing house in print as well as in electronic form, likely will not have enough leverage to dislodge publishers from their current positions. With book sales trending towards digital formats, publishers generally refuse to publish anything in a physical format without obtaining e-book rights too. And major publishers are still the principal (perhaps only) source of major advances, so their negotiating position on this point generally prevails. (In some instances, publishers have agreed to renegotiate e-book royalties after two or three years, or to provide for an adjustment of the author’s e-book royalty if there is an upward adjustment in the industry standard rate, or both.)
Authors who control the e-book rights to their works can make a deal to have their works published digitally by dealing directly with a Digital Distributor, such as Amazon or some of the new entities being established for the primary purpose of exploiting e-book rights. Although these authors probably will receive little or no advance, they will get a greater share of sales receipts; for example, for books selling at retail for $9.99 or less, Amazon offers authors 70% after a small off-the-top deduction.
Authors (and the estates of authors) whose books originally were published some years ago in hardcover and are still in print must consult their publishing agreements to assay their options for e-book publication. When older contracts were written, e-books did not exist and the description of the grants naturally did not explicitly embrace them. Older agreements might limit those rights to “volume rights” or “book rights” and reserve to the author all rights not specifically granted. Some also made mention of microfiche rights, database rights and computer-assisted storage and retrieval rights. Whether or not those agreements convey e-book rights is not resolved, either. Some publishers have made it clear that they will vigorously assert their rights under contracts that contain these ambiguous provisions.
In 2001, Random House sued the electronic book publisher Rosetta Books the day after it opened for business in a copyright infringement action. Random House sought to enjoin Rosetta from selling in digital form eight works — including classics likeSophie’s Choice by William Styron, Slaughterhouse-Five, Breakfast of Champions, and Cat’s Cradle by Kurt Vonnegut, andPromised Land by Robert B. Parker — on the ground that their authors had previously granted Random House the right to “print, publish and sell the work[s] in book form.”3 Rosetta argued in response that the contractual language and basic principles of contract interpretation led to the conclusion that the publishing contracts did not include the right to publish the works as e-books. On a motion for a preliminary injunction, the district court agreed with Rosetta.
The court observed that interpretation of an agreement purporting to grant a copyright license was a matter of state contract law and that in the Second Circuit, a “neutral approach” determines whether contractual language that did not anticipate a new technology nevertheless embraced it. The court looked to Random House’s own Webster’s Unabridged Dictionary for the meaning of “in book form.” It found the word “book” defined as “a written or printed work of fiction or nonfiction, usually on sheets of paper fastened or bound together within covers.” The same dictionary defined “form” as “external appearance of a clearly defined area, as distinguished from color or material; the shape of a thing or person.” The court concluded that the phrase “in book form” did not embrace e-books and held that Random House was not likely to succeed on the merits of its copyright infringement claim and could not demonstrate irreparable harm. Its motion for a preliminary injunction was denied.
On appeal, the Second Circuit upheld the denial of the injunction “without expressing any view as to the ultimate merits of the case.”4 Instead, the court found no abuse of discretion by the lower court where New York law “arguably” applied a “restrictive view” to new technologies, the record was not developed, and the balance of hardships favored Rosetta. It also noted, en passant, that “there is some appeal to [Random House’s] argument that an ‘ebook’ – a digital book that can be read on a computer screen or an electronic device… is simply a ‘form’ of a book, and therefore within the coverage of [Random House’s] licenses.” The parties settled leaving open the ultimate question of whether the phrase “works in book form” embraces e-books.
In July, when Wylie announced that it was forming Odyssey to grant exclusive e-book rights to Amazon respecting twenty novels of Wylie’s clients, including such classics as Philip Roth’s Portnoy’s Complaint and Ralph Ellison’s Invisible Man for at least two years, it was said to be reacting to low e-book shares offered to the agency’s clients by traditional publishers. According to Publisher’s Weekly, Wylie’s Odyssey Books would retain only 10% of receipts after Amazon takes its share — the same that Wylie would receive acting simply as agent — and paying the balance to authors.5 (Many literary agents receive 15% of receipts.) The Authors’ Guild also told members of its understanding that Odyssey was “limiting its total compensation to its rate for commissions.”
Nevertheless, the Authors Guild was concerned by the exclusivity given to Amazon and its potential damage to a “healthy, competitive book publishing market” and further stated that “any direct agreement between a literary agency and Amazon” would be “troubling.” It also concluded that “[t]o a large extent, publishers have brought this on themselves” by offering authors an unjustifiably small percentage of e-book receipts.
The CEO of publisher Macmillan, John Sargent, criticized Odyssey’s decision to sell only through Amazon, characterizing the deal as “extraordinarily bad” for “writers, illustrators, publishers, other booksellers, and for anyone who believes books should be as widely available as possible.” He also disfavored Odyssey’s choice of partner: “This deal advantages Amazon, which already has the dominant share in this market.” Others referred to the arrangement as a literary monopoly, or “vertical integration” for an infant medium.
But behind the clamor raised by a direct exclusive deal between an agent and a Digital Distributor, there lay the salient question raised but not settled by Rosetta Books: did Odyssey have e-book rights to grant? Random House did not immediately sue Wylie, as it did Rosetta Books, but disputed Amazon’s right to legally sell titles that it said were subject to active Random House print publishing agreements.6 And, Random House announced that “on a worldwide basis [it] will not be entering into any new English-language business agreements with The Wylie Agency until this situation is resolved.”
That resolution arrived on Tuesday of this week in the form of this joint statement from Odyssey and Random House:
“We are pleased to announce that The Wylie Agency and Random House have resolved our differences over the disputed Random House titles which have been included in the Odyssey Editions e-book publishing program. These titles are being removed from that program and taken off-sale. We have agreed that Random House shall be the exclusive e-book publisher of these titles for those territories in which Random House U.S. controls their rights. The titles soon will be available for sale on a non-exclusive basis through all of Random House’s current e-book customers. Random House is resuming normal business relations with the Wylie Agency for English-language manuscript submissions and potential acquisitions, and we both are glad to be able to put this matter behind us.”
It seems that every few days there is another significant announcement relating to e-books and the publishing industry. The price of e-book readers continues to drop, which is likely to result in much greater sales of these devices and of e-books. Amazon predicts that its e-book sales will surpass paperback sales, too, during the next year. After two settlements that sidestepped a final judicial determination, the question of whether older print publishing agreements embrace e-book rights is still open. Authors and their representatives are likely to continue to search for alternative routes to digital readers. And although brick and mortar bookstores still are reported to account for the vast majority of books sold, the rising number of e-book sales is being felt increasingly by them, too. Clearly, the publishing industry is being reshaped.
1 “Celebrated Authors Bypass Publishing House to Sell ebooks via Amazon,” by Alison Flood, guardian.co.uk, July 22, 2010.
2 The “Agency Five” are Macmillan, Simon & Shuster, Hachette, HarperCollins and Penguin.
3 Random House Inc. v. Rosetta Books LLC, 150 F. Supp. 2d 613 (S.D.N.Y. 2001).
4 283 F. 3d 490 (2d Cir. 2002).
5 “The Odyssey of Wylie v. Random,” by Jim Milliot with Rachel Deahl, Publishers Weekly, August 2, 2010, at 7.
6 “Celebrated Authors Bypass Publishing House to Sell ebooks via Amazon,” by Alison Flood, supra.