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What is a “Standard” Royalty?

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Jonathan KirschJonathan Kirsch, an attorney specializing in publishing law, serves as pro bono general counsel for the Publishers Marketing Association. He is a partner in the firm of Kirsch & Mitchell in Los Angeles, and author of “Kirsch’s Handbook of Publishing Law” and “Kirsch’s Guide to the Book Contract” (Acrobat Books). Kirsch’s e-mail address is kirschlaw@aol.com.

Question: We are an independent publishing house, and we pay royalties based on a percentage of the net revenues from actual sales, that is, the suggested retail price less the wholesale discount. However, an agent with whom we are dealing insists that a royalty based on suggested retail price is “standard in the industry.” Is she right? What can we tell her to justify a net royalty?

Answer: For a great many years, and until very recently, most book royalties were expressed as a percentage of the suggested retail price (“SRP”) of the book. Some publishers still offer royalties based on SRP, at least in certain limited categories of sale. But it is no longer “standard in the industry,” and nothing in either the law or the “custom and practice” of publishing requires a publisher to pay a royalty based on the retail price of a book.Authors and their agents will almost always seek a royalty based on SRP, of course, because it will produce a higher dollar amount per sale than a net royalty.

For example, if the publisher of a book priced at $10 per copy pays a 10% royalty calculated on SRP, the author receives one dollar per book. If the same 10% royalty is calculated on net revenues-that is, suggested retail price less wholesale discount-then the author receives only 60 cents on a book sold at a standard wholesale discount of 40%.Still, net royalties are increasingly common in publishing, not only among independent publishers but even among the corporate publishers. Here are some points that you may wish to make in negotiating with an agent or an author on royalties.

What’s Fair Is Fair!

I generally argue that it is fairer to author and publisher to use net royalties. After all, the publisher never really receives the suggested retail price-the money actually collected by the publisher on the sale of a book reflects the deduction of the wholesale discount and other costs of sale. By stating the royalty as a net royalty, the author is getting a specified percentage of every dollar the publisher actually collects and keeps.

What You See Is Not Always What You Get

While the largest corporate publishers still offer royalties based on suggested retail price for some categories of sale, such royalties are often a kind of “bait and switch”-the royalty based on SRP is generally paid only on trade sales at a standard discount, and the royalty rate drops dramatically in all other categories of sale, including sales at deep discount. This touches on the fairness argument too, since you can point out that you are giving a fair, honest, and straightforward count on all sales rather than offering an attractive royalty for one category of sale and then dropping the royalty rate for all others.

Net Royalties Are the New “Standard” Royalties

Net royalties are already a standard “custom and practice” among independent publishers. It is a simple fact of life that an independent publisher cannot and will not offer the same terms as a Simon & Schuster or a Random House. Even large publishers in certain fields-academic, technical, and “niche” publishing-are increasingly shifting to a net royalty.

Easy-to-Read Royalty Statements

The use of a net royalty makes royalty statements much easier for the publisher to prepare and much easier for the author to understand. As discussed above, even a contract that starts out with a royalty based on SRP will usually include lower royalty rates for various categories of sale, and that is why authors find royalty statements from the corporate publishers to be indecipherable.

That’s Just How We Do Business

Most publishers adopt a royalty structure and then build their business on that structure. As a general rule, their royalty accounting programs are set up for a given royalty structure. The ability of a publisher to analyze and project the profitability of a given book is enhanced when a net royalty used, and the publisher is better able to make a decision on whether or not to publish any given book. This is a valid argument to make to an author-“Our publishing business, like virtually all independent publishers, is built on net royalties, and we make our publishing decisions on the assumption that we will pay a net royalty.”

The Bottom Line

The bottom line for any book deal is what the publisher is willing to pay and what the author is willing to accept. You can point out all the advantages of working with an independent publisher-the energy, market savvy, commitment, intimacy, vision, dedication, and “stick-to-it-iveness” that the author will rarely find in a corporate publishing house-but, at the end of any negotiation, some authors will always make their decision on the basis of a simple question: Is there another publisher who will pay more?The same reasoning applies to the publisher, of course. If there is a book that you want to acquire, and you cannot get it without promising to pay a royalty based on SRP, then you may decide to pay the higher royalty because you decide that you can make money on the book even with a higher royalty overhead. However, even if you are willing to pay the higher royalty for some categories of sale (i.e., trade sales at whole discounts of 40% or less), you can still insist on a reduced royalty for other categories of sale (i.e., direct sales, deep discount sales, etc.).

In my experience, there are plenty of books out there for which only a single publisher has made an offer-and plenty of books for which no publisher is willing to pay dramatically more than any other publisher.

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