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End the Discount Double-Cross

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In our last installment of the Fair Contract Initiative, we detailed how publishers’ outdated accounting practices consistently delay and minimize authors’ royalty payments. But that’s not the end of the story. In another common practice, publishers routinely use contract provisions to slash authors’ royalties to mere pennies per copy sold.

Standard trade royalties are based on a percentage of the publisher’s list price. But publishers have come up with a variety of clever methods to base royalties on the much lower net amounts they actually receive from booksellers and wholesalers. Then they add insult to injury by cutting the royalty rate itself by as much as two-thirds. When an author gets paid on less than half the list price, that’s bad enough. When an author gets paid only one-third the normal rate on that reduced price, the word “pittance” seems appropriate.

So-called “deep discount” clauses let publishers offer titles to booksellers and wholesalers at big markdowns. They stipulate that a publisher’s sale at a discount of over 55%, for example (a number that appears to be the new standard), the author’s royalty suddenly drops from, say, 15% of list price to 15% of the far smaller amount the publisher actually receives. A standard deep discount clause looks something like this: “On copies of the Work sold by the Publisher at a discount of greater than 55% from the publisher’s retail price through channels outside of ordinary retail trade channels, the author will be paid a royalty of 15% of the Publisher’s net proceeds.” (Many smaller publishers, which pay royalties on net proceeds to begin with, often slash the royalty rate in half on discounts from 50–70%, and by 2/3 for greater discounts.) Thanks to that drop in royalty payments the publisher makes out like a—well, the word “bandit” springs to mind.

It seems fair that when a publisher sells a book at a deep discount, the author’s take might be reduced proportionally. But there’s no proportionality in many standard “deep discount” clauses.

Let’s do the math on a hypothetical book with a list price of $10: At a 55% discount to retailers, the publisher would receive $4.50 per copy, minus the author’s 15% royalty of $1.50. That leaves the publisher $3.00 before printing and other expenses. Increase that discount to 56%, and the publisher receives only $4.40 from the sale. But under some “deep discount” clauses, the author’s royalty would suddenly plummet to 15% of that $4.40—just 66 cents—thereby magically increasing the publisher’s take to $3.74. But what’s magic for the publisher is misery for the author, who takes a haircut of more than 55%. With a clause like this in effect, why would any rational publisher maintain a higher wholesale price when a lower one would deliver 25% more to its bottom line—entirely at the author’s expense?

Yet such royalty plunges seem almost pleasant compared to another type of deep discount clause, one that reduces not just the basis for the royalty (i.e., from list price to net proceeds), but also the royalty rate, often to 5% of publisher’s net, bringing the royalty far closer to nothing than to the original amount. We’ve seen these discount double-crosses applied for sales to book clubs and book fairs, for “special sales” in bulk outside the usual book trade, for large-print editions, for export editions. Let’s say the publisher sells our sample book in bulk for just $2.00. The discount double-crossed author would get one thin dime per copy, a royalty cut of an astounding 93%—even though the net to the publisher would decline by less than 33%.

It’s hard to imagine that a printer who produces the book or the trucker who delivers it would offer to do those jobs for a 93% discount. Thanks to the magic of contract terms, only the author, whose work actually created the product, gets such a raw deal. It’s ludicrous.

Even crazier, some reductions can apply even to direct sales from publishers to readers, despite the fact that the publisher gets to keep the share of the transaction that would normally go to a retailer or wholesaler. If anything, an author’s royalty rate on such direct sales should be higher than normal.

Several contractual compromises could help minimize the damage. The first is a step-down clause that allows the publisher to reduce royalties only gradually as its discount to booksellers increases—say, by 1/2% for each percentage point of discount above the standard. That eliminates the “cliff” that gives publishers a strong incentive to increase profits by lowering wholesale prices at the expense of the author. Second, in a world where 55% discounts have become commonplace, they should be considered “standard,” not “deep.” Finally, “deep discount” clauses should apply only to sales outside normal trade channels. As for the discount double-cross, it should be eliminated by forbidding the publisher to pay the author less per copy than 50% of what it would pay on a standard list-price sale. And the contract should stipulate that sublicenses negotiated by the publisher will include these terms too.

The documented decline in authors’ incomes stems in part from these unconscionable reductions in royalty payments. Unless publishers begin to see authors as partners rather than patsies, many authors will no longer be able to afford to deliver publishers the quality work the industry was built on.

Read more about our Fair Contract Initiative.



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