Wednesday, August 11, 2010

Contemplating New Models

Yesterday on the glorious timesuck that is twitter, Devon Monk asked,

So here's a question: Has anyone tried the Netflix model for ebooks? Buy or rent one month after books are in stores for monthly fee?

I don't know whether anyone has tried it, but I can tell you that as soon as I read that comment, I broke out in math-induced hives. I tried to explain why in my tweets yesterday, but the short format isn't good for this kind of complex issue. So, for Devon, here's a better answer. (Also, everyone should buy her books. Go ahead. We'll wait for you.)

Ready? We're going to subtitle this post,

A Woefully Oversimplified Look at Money in Publishing

Let's start with the basic supply chain. Authors sell to publishers. Publisher sell to distributors. Distributors sell to retailers. Retailers sell to consumers.

That covers it for quite a lot of the books that go home with consumers. There are exceptions -- sometimes authors sell direct to the public (vanity books) or to retailers (as with the kindle author program). And sometimes publishers sell direct to retailers or consumers. But as a general rule, it's a 5-step process to get the book from author to reader.

Here's another general rule. Most of the time, the sales made at each step of the process are handled on a per-copy basis. In other words, the consumer pays a certain amount per copy of the book. Then the retailer pays a lesser amount to the distributor, the distributor an even lesser amount to the publisher, and the publisher an even lesser amount to the author. (Some of you are shaking your heads right now at all the ways this paragraph might be inaccurate. Stick with me. It's accurate enough for our purposes, and we don't need to consider returns and other distribution conundrums for now.)

The consumer, and everyone else along the chain, knows that the price is per copy. You don't pay $7.99 for a mass market paperback and expect to take home an infinite number of copies for that one-time $7.99 payment. The whole accounting system through all five steps is more or less built on this basic assumption: we pay for every copy we buy (or collect for every copy we sell).

There are exceptions. Before we get to those, let's think for a moment about how an author's contract is written. There's a rights clause detailing which rights are being transferred from author to publisher. Example:

Author hereby grants and assigns to Publisher for the term of the Agreement the following rights, whether now existing or hereinafter arising, in and to the Work:
1. The sole and exclusive right to print, use, manufacture, publish, distribute, and sell the Work in book form, whether paperback, hardcover, paper-over-boards, trade paperback, mass market, or otherwise, and in audio recording throughout the World in any language
whatsoever, and to license others to do so.
2. The sole and exclusive right throughout the World to sell or use and license others to sell or use any and all subsidiary and performance rights in and to the Work, and any part thereof, including but not limited to all of the following rights: (i) first serial, (ii) second serial, (iii) abridgment or digests, (iv) book club, (v) reprint by another publisher, (vi) translations, (vii)
tape, record or other recordings, (viii) dramatizations, (ix) use in, as or for motion pictures, (x)
transmission or other use by radio or television, (xi) in any digital form by any mechanical, electronic or other means now or hereafter known.

You see how the rights are broken down and detailed? That's because, in general, rights not transferred specifically are reserved to the author. Not all contracts break them out in such a sweet outline form, but they all list which rights are being transferred, and they generally distinguish between primary and secondary rights (also called subrights). In our example, paragraph 1 deals with the primary rights and paragraph 2 deals with the subrights.

Later in the contract, in the payments clause, each of those specific grants will be handled separately. The percentages for each tier will be spelled out carefully, for example:

(c) Discounted sales. On all net copies sold at a price lower than the lower regular wholesale price through special arrangements with charitable or professional associations or similar organizations, a royalty equal to seven percent (7%).

I won't C&P an entire payment clause here because they generally run long and they're super boring. (Much like this post, alas.) The important phrase to note here: On all net copies sold.... It's what I was talking about earlier, that we expect payment to generally be made on a per-copy basis.

Subrights, though, are handled something like this:

Except as otherwise provided below, Publisher shall credit the Author's account with 50% of net proceeds received for the disposition of Secondary Rights.

And there may also be a listing of specific secondary rights and how the splits will be measured. In any case, for those kinds of rights, money is aggregated rather than measured on a per-copy basis. The publisher collects a lump sum for disposition of the secondary right -- $X for book club rights, to be split equally between author and publisher regardless of how many copies the book club sells. See the difference in the language? On all net proceeds, not On all net copies sold.

Which brings us to the netflix model. As you may know, netflix charged a monthly fee in the $10-20 range, depending on your subscription plan, and for that amount you may rent a certain number of movies each month. Can this be applied to books? Possibly, but it could be a wicked headache come royalty time. Let's start by asking into which general category such rentals would fall.

Option 1: We would have to treat it as a primary right and apportion some amount of each month's fee to each month's rentals.

This is what gave me math hives. Let's say Randy Reader pays $12 a month and rented 6 books by 5 authors published by 4 different houses. Theoretically, some portion of that $12 would then be split among the 6 books by 5 authors at 4 houses (with everyone in the supply chain taking a cut, too). And what do we do if he keeps the book through more than one rental period? And what do we do in the months where he rents 30 books for the same $12 -- how does that affect the bottom line numbers when we're calculating royalites? How can we ever hope to have an accurate accounting with such a system? You see? Hives and headaches all around. It's do-able, certainly not impossible, but ::shudder:: (I will let you do your own math to try to calculate how much an author might receive per rental come royalty day. Don't forget to withhold portions for everyone in the supply chain.)

Option 2: Treat it as a subright and do a lump payment.

The more sensible option, perhaps, would be to treat this like a book club. Charge the rental-retailer a lump fee for the right to rent the title over a set period, and then split the money received in half. Calculating the lump sums would be its own ring of hell, but it would be far better than the alternative. Of course, this presumes that the contract will allow for this kind of rights transfer. Maybe it will and maybe it won't. (If you think that's not an issue, consider all the wrangling over e-rights on backlist now in progress.)

So there you have it, everything I wanted to tweet yesterday but couldn't cram into 140-character bites. Thank you, Devon, for the great question.



ClothDragon said...

You know, I don't think netflix gets to just go buy any old copy of the dvd off the shelf and start renting it out to people. Do you know how their bookkeeping works? Not saying that it would work for books, just that I don't know how it works for movies.

Jordan said...

This may not be quite the same thing, but the question reminded me of the "Book rental fail" from FailBlog a couple years ago:

book rental service?

was just thinking. my sister does -alot- of reading, and spends like $1000 a year on just books alone. most of them she reads once then never looks at again. is there any kind of like…video rental store but for books? would make things alot cheaper, plus once one person had read one the next person can get enjoyment from it etc

(On that note, my library does offer ebooks.)

Edittorrent said...

@ClothDragon It probably doesn't matter how netflix handles the accounting because performance art contracts are set up differently. Yes, they have back-end clauses, but the basic structure is different enough that it might not make a good basis for comparison.

Devon Monk said...

Great post, and thank you for following up on my Twitter question!

I'm still muddling around if the Netflix model can work. Without knowing what Netflix's payment model is, we really can't compare to begin with, I suppose.

And I think there are other factors too. Netflix offers some movies for free streaming.I think that selection varies, for X amount of months, Y movies are free to download. Then those go back to only being available in "hard copy".

Limiting how many books per price could be downloaded each month might help with the pricing structure, though I understand how the monthly fee would have to make sense for all portions of distribution (including being affordable for the readers) and I'm not sure that it's possible, though I'm not sure it's impossible either.

Great food for thought!

Thank you again!

Edittorrent said...

@Devon, yes, but we're still constrained by the contracts we have in place already. Some contracts might cover this model, and some might not.


Devon Monk said...

I agree that it should be a separate right granted in the contract. As you pointed out, copyright is broken down into many little bits.

I am not convinced it should be the the exclusive manner in which to "sell" ebooks (rent really, since they'd have to be removed from the reader before new books could be reloaded--just like Netflix mail-order option, not like the free streaming option) but it is an interesting model.

Thanks for the discussion!

Evangeline Holland said...

Considering that Netflix just paid one billion dollars for the digital rights of more films, I consider the topic to be an interesting concept. Right now we have Overdrive, which is, IMO, an incredibly complicated service to use. Plus, with the rise in text-book rentals (both print and e-book), who is to say that an e-book rental/streaming service along the lines of Netflix isn't a possibility? If Hollywood is quickly hammering out new terms in this technological age--terms driven by consumer desires--why wouldn't publishers jump on this?

Jami Gold said...

Okay, after eating the two cookies I earned for reading this whole post, I might be able to think coherently.

I'm of two minds on the matter.
A) Yes, the netflix model might work along the lines of the book club-type rights (but as T pointed out, current contracts might not allow for such a thing).
B) But I also wonder if the market needs something like this in the face of . In many ways, PaperbackSwap is very similar to the netflix model, but is completely decentralized (therefore outside the realm of publisher's contracts).

Anonymous said...

Wouldn't that work in the same way as UK libraries lending out limited-time ebooks and them paying the author whatever percentage has been agreed for ebooks vs print books?

Sarah Laurenson said...

Are people actually paying for what they can get for free at their local library? Curious.

Adrian said...

I can buy books at retail, and start a rental business or a lending library. I don't have to pay anything more to retailers, distributors, wholesalers, publishers, agents, or authors. All that accounting is already done when the retailer sells the book to me. None of the contracts involved me.

There's a legal term called the "doctrine of first sale" that says once you sell me something, you no longer have a say in what I can do with it. I can give it away, loan it, rent it out, burn it, or resell it. The only things I can't do is distribute additional copies of it or perform it publicly, because those rights are retained under copyright law.

Now, you'll notice with some goods, like software, there's a clickwrap/shrinkwrap agreement that spells out what you can and cannot do with the copy. How does this work given the doctrine of first sale? Well, technically, you're not buying a copy of the software, you're entering a contract with the publisher who's licensing some rights to you the consumer. The whole thing is pretty shaky on legal terms. For example, you shouldn't have to pay sales tax on software if you're just licensing it rather than buying it.

With electronic media (movies, software, and probably ebooks), things are murky. Are you buying a copy or entering into a licensing agreement? Did the publisher apply digital restrictions management (DRM) or other technological protection measures (TPM)? If so, then other legal nonsense kicks in, and they could probably prevent somebody from renting out copies without a special licensing agreement. That agreement would specify the accounting rules.

In the old days of VHS, videos were priced very high--to the point that only video rental places could reasonably afford a copy. This was called "pricing for rental". Later, they realized there was a consumer market as well, as they started to use "priced to own" schemes. Video rental places benefited from this, since they could buy the same cheap copy as the rest of us and legally rent it out many times.

Edittorrent said...

@Adrian -- Yes, I agree, except that library trade is often handled differently. Sometimes the books are even manufactured differently.


Edittorrent said...

@Sarah - Yes, because not everything is available at the library. That's changing and will continue to change as libraries do more electronic lending.

Libraries are forming pools to purchase rights to certain digital titles. They're distributed differently than other e-books and other print books.

See, this is why I had to subtitle the post "Woefully Oversimplified." The distribution reality is a general 2-part scheme with countless exceptions.


Edittorrent said...

@Jami - Do authors get paid anything for books that go through paperback swap? I have no beef with secondary markets or lending libraries, but we still want authors to earn decent incomes.


Edittorrent said...

@Stevie-Carroll - Yes, similar, but the author isn't paid per download in most library lending. I haven't personally worked UK library distribution, though, so I can't get more specific than that. But the library distribution I've worked on in north America amounted to a one-time fee paid by the library for more or less unlimited rentals.


Anonymous said...

I Googled (much easier to do from home than from work) and the UK Public Lending Rights system covers books but not audio books (no specific mention of ebooks), and pays out a few pence per loan up to £6,600 in any one year. It only covers authors living in the EEA at the time they choose to enter the scheme.

If I find someone that knows more about the scheme than that, I'll report back.

Jami Gold said...


PaperbackSwap simply connects someone who's finished with a book with someone who's looking for a copy.

Imagine that when you finish a book, you give it to a friend. And then when they're done, they give it to one of their friends (and so on and so on). Now scale that to the entire U.S.

The original copy was purchased under normal means, but no charges follow after that for the subsequent "swaps" other than the cost of mailing the book to the recipient.

This could be seen as hurting authors except there are some market-driven restraints inherent in the system.
- supply and demand: when the new Nora Roberts comes out, sure, everyone and their sister would love to get it for "free", but if only 5 people in the system are willing to give up their copies, those waiting will probably give up and buy it on their own rather than wait 2 years for their turn
- keeper books: the most beloved books are rare in the system because no one wants to give up their copy
- credit padding: if a member sees a huge waiting list for a book that they can pick up cheaply with their amazon or B&N discount, they might buy a copy to enter into the system just to get an easy credit to their account
- out-of-print books: sometimes PBS is a great way to obtain out-of-print books, often exposing new readers to the author, expanding their fan base

In other words, most books "travel" through the system only 1-3 times. Simply because of the time factor in mailing books via media mail, you wouldn't see a single book making the rounds through 20 different readers (that would probably be a minimum of a year's worth of time). Heck, 70% of the books I've gotten from them, I've kept. So for me, it's a way of swapping the books I don't want for those I do.

green_knight said...

I don't see why we can't have a book rental service. You can already protect PDF files with passwords; all you need to do is to make that password time-sensitive. That shouldn't be a programming task of epic proportions.

All you need to do is to tell Netflix or whoever administers the scheme: you can do this, if you produce a copy that says 'this book will expire on [4 weeks from activation]' and pay us $x when it is downloaded'. $x needs to be a small sum (you're competing with $2 e-books that the reader owns) but you can be flexible: not release it until the hardback has been out a while (even if you say six weeks), higher prices at first, gradually dropping.