Why You Can’t Actually Sell an E-book (and What That Just Might Mean for Your Finances)

by Mike Shatzkin

You can’t have a discussion of any length about e-book sales and pricing and digital rights management in any group of digital publishing observers today before you hear that it is somehow wrong or unfair that “purchasers” can’t do everything with an e-book they’ve bought that they do with a print book they’ve bought.

That is: various “controls”—sometimes deliberate (DRM) and sometimes circumstantial (tech doesn’t always work smoothly)—make it hard or impossible to lend, give, or resell an e-book in the same way that you can lend, give, or resell a printed book. Have enough of these conversations, and you will become educated about “first sale” rights, which are enshrined in law, and which basically say that when you buy something you own it and can lend, give, or resell it.

So the way the complaint often goes is that those damn publishers are putting this damn DRM on my e-books, so I can’t do all the things with them I can do with my print books.

This has always struck me as highly questionable on its face. First sale rights make complete sense with something physical. They make no sense with something digital. When you lend, give, or resell a print book, you don’t have it anymore. When you lend, give, or resell a digital file, you still have it, and you could lend, give, or resell it again and again without limit. Surely, that’s a distinction that justifies a departure from the physical world paradigm.

The complaint that first sale rights are being abused—often delivered as a complaint about publishers—proceeds from a fundamental misunderstanding that publishers themselves are entirely responsible for creating.

Consumers don’t actually “buy” an e-book the same way they buy a physical book. What they actually buy is a license to access a digital file, which—in the developing world of the cloud—they may or may not ultimately “possess” in any machine or device they own. (Of course, they can own the machine or device, which is physical. If they lend, give, or resell it, they won’t have it anymore.)

Publishers promulgated the idea that a consumer can buy an e-book. From the beginning, they analogized e-book distribution to print book distribution. They started out using about the same retail price and about the same discount structure for intermediaries as they did with print books. Some, at the very beginning, even tried to make the royalties the same (in the neighborhood of 5 to 15 percent of the retail price).

It seemed simple, and it seemed logical. It has turned out to be neither.

It’s the Split, Stupid

There is a core reason publishers promote this nomenclature of misunderstanding. Publishing contracts vary widely, but one thing is pretty common among all of them and has been for a very long time. They enumerate the splits between publishers and authors on rights sale revenue for a long list of possible transactions: first serial, second serial, book clubs, paperbacks, cheap hardcover editions, foreign editions in English, foreign editions in foreign languages, and others.

And then the contracts almost all say—almost forever have said—that all rights transactions not enumerated will see revenue divided between authors and publishers 50-50. In fact, according to some agents, even in contracts where an e-book royalty is specified, proceeds from the sale of electronic book rights are almost always specifically designated to be split 50-50.

So if publishers called their e-book transactions what I believe these transactions really are—rights licenses—they’d have what looks to me (but I’m not a lawyer) like a contractual obligation to pay authors half the revenue. Since that is double what many publishers, and all the big publishers, think is “fair” and commercially viable, there’s no motivation to move the conversation back in that direction, even if it would make the consumer interaction, and the restrictions policed by DRM, sensible.

Of course, smart agents have been thinking about this question too. They see very clearly that e-book sales are different from print book sales. First of all, e-book sales are almost always governed by a contract between the publisher and the consumer’s source. That’s not true (with very rare exceptions) for relationships between publishers and print retailers or print wholesalers.

But it is true for the relationship between publishers and book clubs. In fact, the publisher–book club relationship has much more in common with the e-book marketplace than the publisher–bookseller relationship does. Book club deals are covered by licenses. Book clubs “print” their own editions, just as e-book resellers deliver the books in their own proprietary formats.

It is worth emphasizing here that the publisher (in today’s world) seldom delivers the file directly to the end consumer. The fact that the publisher gives an intermediary a clean digital file, which the intermediary then manipulates and copies (or, we could say, “prints” in its own proprietary edition) to deliver to its customers, underscores that there is activity between publisher and consumer that falls under a license. And it is a license that is spelled out in a contractual relationship.

But agents have apparently chosen, at least for now, not to fight the royalty battle with publishers on these terms. Doing so would mean employing a sort of nuclear option; the agents might be right and they might even win in court (eventually), but they’d effectively deal themselves out of the game from the moment they attempted to enforce this position.

This is symmetrical with the publishers’ restraint on the noncompete clause. From the publishers’ perspective, it is transparent and obvious that an e-book edition competes with a print book edition of the same book. All book contracts have noncompete language. But no publisher has yet used that particular argument to strong-arm an author who wants to self-publish an e-book when the author’s print contract didn’t contemplate e-books.

Despite the flare-up that occurred last year when agent Andrew Wylie appeared to go toe to toe with publishers for a little while before he apparently backed down, both sides want to continue doing business and prefer to negotiate solutions rather than attempt to impose them, even if they have a very strong position.

The Downsides of Telling the Truth

Even though authors don’t sell their copyrights to publishers (they license their use) and publishers don’t sell inventory or even production masters to e-book resellers (they license them to replicate and distribute the publishers’ e-book files), the fiction that Kindle or Nook or Kobo or Google or iBookstore is selling the book to the consumer will persist.

If we had truth in labeling here, it would make the restrictions comprehensible. It would even make consumers understand why Amazon was within its rights (and upholding its responsibilities) when it chose to “cancel” the licenses it granted erroneously for an edition of 1984 a couple of years ago. We can all recall the high dudgeon among many observers when Amazon infamously reached into people’s Kindles and erased a file they’d been given by somebody who did not have the rights to grant those licenses to it.

But truth in labeling would also eliminate an ambiguity that works in favor of publishers’ margins today.

What would worry me if I were a publisher is that someday somebody who is not an agent trying to keep things sweet with publisher customers will file a lawsuit to make the case that e-book sales are licenses already covered in just about every publishing contract. That would suggest a potential liability equal to half the e-book revenue minus what has been paid so far on every e-book ever sold under any contract where that kind of rights-split language still governs.

Publishers have perhaps mitigated their exposure by putting new e-book agreements in place with many authors, but they still wouldn’t want a court poking its nose into this particular problem.

On the other hand, it would certainly make things a lot clearer and stop a lot of silly conversations if we all understood that e-book access is granted by license, not sale.

Coda

Again, I am not a lawyer, but the recent Supreme Court decision to deny cert in the Eminem case—letting stand a lower court ruling that digital downloads are licenses, not sales—certainly seems to suggest that the U.S. law today is in line with the logic expressed in this piece.

Mike Shatzkin, founder and CEO of The Idea Logical Company, has been an industry consultant for more than three decades. His blog, The Shatzkin Files (idealog.com/blog), is the source of this article, and he reports that he enjoys dialog with others in the industry. To reach him, email mike@idealog.com.