Tuesday, January 26, 2010

Authors Guild Panel: E-Rights + E-books = Turmoil

The Authors Guild held an event at Scandinavia House January 18. I believe that the title was E-Rights + E-Books = Turmoil. I only know this because the person introducing the event mentioned it. There was no placard or handout announcing the event, as one usually finds at these sorts of events. I think that the emphasis was more on the substance of the discussion than the usual promotional elements. In any case, the title (as I understood it) seems to succinctly capture the tone of the evening, which gave no indication that the equation posited is anything but correct.

My notes are below, with the caveats that they are my best rendition of the discussion, with no claim to accuracy; much of the discussion has been paraphrased, rather than being a direct quote of the participants. I bring my own viewpoint and perspective to this discussion, which inevitably and inescapably influences my perception of the discussion. In other words, I am not contending that my write-up is “Fair & Balanced.”

The room looked to be able to accommodate about 200 people under normal circumstances. Given the gravity of the topic, especially to the author community, the room was filled to overflowing such that about 20 attendees were asked to sit on the stage, the steps were lined with people standing, and, I was told later, there were numerous people who were not able to get into the room at all.

This event was co-sponsored with the Association of Authors Representatives. Sidney Offit (spelling?), president of Authors Guild Foundation, opened the session. He introduced the moderator, Michael Cader (MC), of Cader Books.

The panel members were Jane Friedman (JF), CEO and Co-Founder of Open Road Integrated Media and former President and Chief Executive Officer of HarperCollins Publishers; John Sargent (JS), CEO of Macmillan; author Susan Cheever (SC) and literary agent Ira Silverberg (IS).

MC started the discussion by positing that the only problem with the session was that there were too many things to talk about. His primary intention, he said, was that the panel recognizes the need for meaningful conversation among publishers, authors & agents. We’re here to learn, not argue, he said, pointing out that this is not a tea party. (Note: two years ago, a “tea party” would have been a metaphor for a calm and civilized discussion. Now it means exactly the opposite.) MC also pointed out that the session was a public forum so that while the participants would try to be as candid as possible, they may nonetheless have constraints, especially since there are annoying people like myself taking notes and posting them publicly.

The first issue raised by MC was that the publishers’ position on E-books was not yet accepted by authors and agents.

JS began the discussion by voicing his concern that a proposal which Macmillan had sent to a small number of literary agents wound up being published in the New York Times. (Note: That seems in keeping in the moderator’s caveat about the public nature of this discussion in general.)

JS continued that the new formula was intended to get general agreement on a percentage of net proceeds of E-book revenues that would be returned by the publishers to the authors. They arrived at their preferred rate by examining their current royalty expense across all formats of printed books – trade, paperback, backlist, etc. – and found that it was 18.6% of net revenues attributable to those formats, which Macmillan then rounded up to 20%.

He admitted that he had heard that some publishers were paying up to 25% of net proceeds. Of course, antitrust law prevents him from discussing this issue outright with his nominal competitors. He recognized that Macmillan’s 20% was regarded “as less than satisfactory in the agent community.” He said that response had not convinced Macmillan to change its 20% rate in general, but that he understood that the marketplace is 25%. He also said that Macmillan would be willing to discuss the 25% royalty rate in every individual case.

He finished by arguing that the publishers agreements are better than the Google agreement. However, as he said, “We’re not at the end game, so we don’t yet know what the right number is.”

MC asked whether publishers are looking for a single rate for all varieties of E-books vs. the different rates that apply to books in different formats and at different points in their life cycles.

JS defended a single E-book rate by arguing that E-books are all a single product. Their rates are therefore different from book rates, which evolved from different formats. By the same token, however, he said that Macmillan has not negotiated any contract yet, implying that this discussion was somewhat theoretical at this point.

IS leapt into the fray. He argued that using the average royalty rate on print products is unfair, particularly given the different costs of E-book production. He also thought that an unlevel playing field was being created since JS had implied that the outcome of each negotiation depended on the clout of the particular author. Furthermore, he was concerned about locking in rates now when they could change in the future – “We‘re in transition.” He felt that since the business was being reinvented, he wanted to “play it straighter.”

JS defended the approach to negotiation by pointing out that different authors already get different contracts, including different rates, depending on their negotiating power.

IS, addressing the issue of a general rate for E-books, argued that backlist revenues could be pure profit to the publisher due to advances having been amortized and the lack of physical costs. The allocation of net proceeds for backlists was therefore different from issues regarding the frontlist revenue. Therefore, he contended, the largest share of net proceeds should go to the author.

The question arose as to whether E-books included books printed on demand, and JS affirmed that they did.

JF raised the broader issue: Do publishers have the rights for deep backlist? She felt that the issue of rights had to be addressed before the issue of royalty.

She was also concerned that it takes a long time to write a new contract, having been through that process herself. The contract developed at Random House in 1994 already referred to e-rights. Nonetheless, she felt that we are not in a transition or evolution; we’re in a revolution. It is therefore imperative to look at where the publishing community is headed. She was very concerned that, while books will continue to exist, that if the publishing industry does not embrace the digital revolution, it will be in big trouble.

MC therefore wondered about the pathway to resolution for these issues? Litigation?

JF said that she would like a friendly resolution. With regard to rights issues, they applied only to books from before 1992-1994. Afterwards, e-rights were in contracts. Nonetheless, this issue is very important to her company, Open Road, since it specializes in backlists because it wants to bring many now-neglected authors back to life.

SC felt that the question of e-rights will be settled, both in the courts and through negotiations. She felt that the broader issue is that we’re in the middle of a whirlwind that she likened to the invention of the printing press. (Note: this seems to be a common metaphor, having been raised in the discussion at last week’s Digital Breakfast as well.) She wondered whether the digital revolution will change the way we write and read. Will it change her relationship with her audience? For example, if technology allows her readers to purchase and read her books chapter by chapter, will she alter her approach to writing to do so chapter by chapter?

The discussion shifted to the respective roles of authors and publishers when MC posited that publishers look for authors to bring their audience to their work.

SC asked whether authors could now go directly to their audience without needing publisher, a role which the publisher had previously fulfilled.

JS argued that there is still a need for publishers in the digital age. He felt that they have acceded to the interests of the authors and have not exploited electronic rights unless authors want to - both frontlist and backlist. Furthermore, in the digital world, there would still be tremendous complexity involved in book publishing with regard to the multiplicity of digital platforms, DRM complexities, and so on. Furthermore, he argued that marketing would still necessary from publishers, perhaps even especially so if everyone goes directly to Amazon so as to stand out among the many choices available to readers.

JF also felt that a direct relationship between the author and their audience does not necessarily disintermediate the publisher. She took umbrage at having been called a “distributor” in an article in the New York Times. She adamantly maintained that she is a publisher, not a distributor.

She argued that the most important marketing tool for a book was word of mouth. Consequently, the biggest issue today is the ability of the publisher to market the author directly to consumers, especially in a world where consumers have short attention spans. She said that she does not want to lose a single sale. However, changes in demographics create changes in consumer behavior, and the publishing industry will have to adapt. For example, the youth audience wants books when they want it and how they want it. The publisher has to create the appropriate platform for this new environment.

SC pointed out that the author creates the thing that everyone is arguing about. Will there be a change the way people read, and by implication, the way that authors write?

IS was definitive that the reading experience will change. He cited a rendition of a David Foster Wallace novel in which the reader can click through to footnotes while in the body of the text. He also cited the Vook, which is adding audio and video components to books.

Also, publishers are important for marketing to retailers, which individual authors can not do. He therefore wants to be sure that authors are getting a fair piece of revenue, especially if authors bring new pieces or components to the equation as books evolve. He took publishers to task for not having adequately talked about the exciting components of changes in books.

What is next?

JS defended the actions of publishers by pointing out that there is a wide disparity of viewpoints among the various parties, which he compared to a complicated game of chess. He said that he is trying to get biggest piece of revenue possible for publisher/author in battle with the retail channels. He felt that, in the next 6 months, the foundations will be set for both retail prices and the publisher/author split of those prices.

In discussing developments made possible by E-books, he indicated that he was not enthusiastic about interactive video in the middle of a novel, preferring the traditional interaction between author and reader. He did concede that such functionality would be fine for DIY books such as yoga and cooking. In general, though, he was concerned about how to increase the connection between author and audience.

He also raised the concern that he is already seeing the shortening of books – as he said, he doesn’t want to see USA Today vs. New York Times. He also does not expect novels to be sold by the chapter. Authors are the creative force, so he is counting on them to come up with new ideas.

SC put it succinctly: What authors want is to get paid. If they write by the chapter, do they get paid that way?

JS felt that for non-fiction work, authors would be writing at least in chunks, as opposed to completed manuscripts. He said that overall payment would be based on net proceeds.

JF took that broad view that this is the most exciting time in publishing she could remember. The right approach was not doom and gloom; instead, it is important to assess how people will read differently. The author would remain as the brand. New formats such as the Vook would create unique opportunities. Likewise, for marketing, it is important to use all forms of multimedia and social networks. Furthermore, at Open Road, they have a “movie eye” on all projects as a way to further exploit the intellectual properties.

She felt that there should be rejoicing among authors, who will be able to write what they want to write.

Audience Question: Authors spend their lives in isolation. If they are dissatisfied with their publisher, can they leave?

JS answered that the standard answer is: it depends on the contract, which is the result of a process of negotiation. He also pointed out that electronic rights will become a bigger piece of the business. Publishers had been more flexible about exploiting electronic rights when they were less important. Now, they are a larger piece of the revenue and will be taken into account in the calculation of and considered part of the author’s advance.

JF asked rhetorically, How much are electronic rights worth? Nobody knows. She cited an example from 10 years ago, that the industry had gotten excited about the Rocket Book, but nothing happened. With the number of devices coming out, what is the audience size? How big can it be? She thinks it’s enormous and wants to share it with the author.

In dividing up the economic pie, JS pointed to the costs incurred by publishers in the E-book world. Even though they do not have printing costs for E-books, they still have overhead from traditional publishing, such as warehouses, since they have “a foot in each world.” In addition, E-books have their own infrastructure - server farms, electricity and other digital overhead.

Underlying all of this discussion is the concern that the value to consumers of an E-book is settling in between $9.99 and $12.99.

IS was not particularly sympathetic to the issue of the publishers’ costs, pointing out that when McMillan shifted from typewriters to computers, they incurred new overhead costs, which he was presumably loathe to cover out of proceeds that would otherwise have gone to his clients.

Buttressing his concern about costs, JS pointed out that trade paperbook printing only saves $1 over the costs of a hardcover book, implying that reduction in consumer value and pricing is not necessarily reflected in equivalently reduced costs.

Returning to general themes, MC was concerned that the underpinning of trust between agents and publishers is eroding. In addition, authors are concerned about diminishing advances, which is an economic issue, not particularly a trust issue

SC reiterated her earlier comment that she does not want the parties involved to worry only about their own “trenches.” She argued that everyone needs to think about everything and keep in mind the health of the entire book ecosystem.

With regard to the issue of retailers intruding into the publishers’ domain, JS argued that large retailers have already done their own publishing, so he was not threatened by the development of Amazon going directly to authors. In contrast to MC, he does not think that publishers are “at loggerheads” with agents. Further, he does not feel discussions have been antagonistic. The difference in the dialogue is his example that agents disclosed his letter to the New York Times rather than responding directly to him.

With regard to Amazon’s role in the development of the E-book marketplace, IS wants publishers to protest retail sales at low prices.

JS defended publishers from taking such actions by pointing out again that antitrust prevents publishers from discussing retail prices.

JF also pointed out that publishers have always suggested retail prices, so everyone is accustomed to an environment in which publishers can’t force retail prices.

Audience Q: what will the function be for publishers?

JS felt that the more clutter that exists, the more publishers can do for authors. The clutter reduces the “signal-to-noise” ratio, and the publisher can help an author cut through that. He viewed the publisher’s function as that of looking through the universe of manuscripts and selecting those with commercial/literary merit and promoting them. He felt that authors need the publisher’s expertise in order to convert new marketing methods - social networks, etc. - into sales.

SC’s viewpoint was that the ultimate goal of the writer is to get people to read their work, not to get it published, which is simply a means to that end. Publishers are there to help authors to do that.

JF also agreed that publishers cut through the clutter. Furthermore, there is now more clutter than ever because there are more books. For example, last year, for the first time, there were more titles that were self-published than published by traditional publishers. She also felt that there will be lots of experimentation in the book publishing industry. Book reviews don’t really exist anymore, and the blogosphere is a cluttered environment - sometimes it brings books to the public’s attention, and sometimes it doesn’t.

JS said that publishers are working on backlists, digitizing books and optimizing search for those books, but that they are focusing their resources on frontlist books.

For precisely that reason, JF wants her new company to work with traditional publishers to market the deep backlist because traditional publishers are focused on frontlist, including print copies.

IS asked whether JF’s OpenRoad was in conflict with traditional publishers?

JF replied that the relationship should not be combative. She felt that there is a lack of understanding as to what her new company does. She wants to create relationships with traditional publishers and to do their emarketing. She was hoping to establish 50/50 partnerships with publishers.

Q: What deals are being done for E-books?

JS pointed out that all contracts now include electronic rights. Royalty rates are currently based on the list price of electronic books. The formula is shifting to a net proceeds model due to changes in splits between retailer and publisher. While the rates are not yet set, in his mind, literary agents are claiming that the market rate is 25% of net proceeds.

MC pointed out that there is often ambiguity over definitions and asked for clarity on the meaning of gross vs. net.

JS defined net proceeds as gross revenue minus returns.

Q: Aside from marketing, how could publishers help exploit the interactive potential of E-books?

JS asserted that publishers view themselves as part of the creative team. He therefore viewed that is a battle for competitive advantage among book publishers since he felt that there was an uneven level of quality among the editorial staff across the industry in terms of knowledge, ability and helpfulness.

Q: What will change?

JS projected that e-book revenue, now 4% of total revenue, will grow to 7-8% next year. It will be the fastest growing segment of book revenue, but will not yet be a profit generator. He also expected to invest a lot of resources in setting up retail relationships, creating electronic infrastructure, etc., because he felt that publishers need to have the new environment figured out when E-book revenue hits 15-20% in a couple of years.

JF was more aggressive, asserting that the industry needs to figure out the appropriate split sooner, and that the process won’t take several years.

JS felt that development of the industry would be hampered by the fact that it does not yet have the basic business model in place. For example, Google is using an agency model while Amazon is a retail model.

Furthermore, he felt that much will depend on how much consumers are willing to spend on a book. If they can not get a book at a fair price, he argued that they will steal it. Therefore, he wants to protect intellectual property at as high a price as possible that will maximize sales.

JF felt that turning away any sales of ebooks is bad. It is necessary for publishers to meet consumer demands when they want the book. In return, she feels that the consumer will pay more for the book they want.

Summary: The size and participation of the audience, the quality of the panel members, and the energy of the discussion all spoke clearly to the importance of this topic to all members of the book publishing industry, and, by extension, to all of their consumers and readers. Furthermore, developments in the ebook industry are likely to have ripple effects on creators of intellectual property in all media.

The environment is quite unsettled. Can the participants wait for the evolution of the industry to calm down and indicate the direction in which it’s headed, or will the pace of change, and therefore chaos, simply accelerate? There are no answers today on which all parties can agree. Consumers will continue to generate a demand for books and other authored material, regardless of how the industry participants choose to interact with each other. How will the industry address those issues? Let’s turn the page and proceed to the next chapter.

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