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Random House, HarperCollins Look to Lock In Low E-Book Royalty Rates: 5 Ways to Protect Yourself

March 18, 2010. Random House and HarperCollins are sending letters to authors and agents seeking amendments to contracts regarding e-book rights.  These letters, although some suggest that the author’s work was “selected” for digitization, appear to be going to virtually all authors who have no stated e-book royalty rate in their contracts.  In some cases, the letters have gone to authors who have never granted e-book rights to the publisher. 

These amendments should be treated with extreme care.

E-book royalty rates are low at the moment.  Both publishers are trying to lock in e-book royalty rates at 25% of net receipts.  As we’ve previously said, we believe this will prove to be a low-water mark for e-book royalties:

Authors and publishers have traditionally split the proceeds from book sales.  Most sublicenses, for example, provide for a 50/50 split of proceeds, and the standard trade book royalty of 15% of the hardcover retail price, back in the days that industry standard was established, represented about 50% of the net proceeds of the sale of the book.  We’re confident that the current practice of paying 25% of net on e-books will not, in the long run, prevail.  Savvy agents are well aware of this.  The only reason e-book royalty rates are so low right now is that so little attention has been paid to them:  sales were simply too low to scrap over.  That’s beginning to change.

Here’s how to protect yourself:

1. Get the absolute right to renegotiate.  If you accept these low royalty rates, don’t lock yourself in.  Try to obtain the unconditional right to renegotiate the royalty rate after a period of, say, two years.  If you don’t get the unconditional right to renegotiate, then, at a bare minimum, you should have the right to renegotiate if industry standard royalty rates change or if the publisher’s standard royalty rate changes.  We can help you with the contractual language.

2. Negotiate for a royalty floor.   Insist that your royalty amount (in terms of dollars and cents, not percentage points) for e-books will never fall below the royalty amount for the print edition of the work.  It’s best to peg the minimum to the royalty amount for the hardcover edition of your work.  If not, then have the minimum royalty tied to the royalty for the prevailing print version at the time the e-book is sold.  This will keep e-book sales from eroding your royalties.

3. Double-check your reversion of rights clause.  This is critical.  If your reversion of rights clause doesn’t have sales thresholds in it, your publisher can argue that availability in any edition — regardless of the number of sales — means your book is “in print.” (We don’t agree with this interpretation of older contracts, but some publishers argue this with a straight face.)  Take this opportunity to clarify your reversion of rights clause by inserting a minimum number of annual sales for a work to be deemed in print.  Again, we can help with the language.

4. Check your contract; you may control e-rights.  Some of these letters have gone to authors of books for which the author hasn’t granted the publisher electronic rights.  Others have gone to authors for books in which all rights have reverted.  Please contact us or your agent if you have questions about your contract.

5. If you can’t obtain adequate safeguards, you may want to bide your time.  The e-book market is still a small, developing market, with uncertain economics.  Publishers and distributors are fighting major battles over business models.  For some books (children’s picture books, for example), the market has been especially tiny, although some believe Apple’s new iPad may soon change that.  In any event, e-book publication isn’t a now or never proposition, and signing the contract amendment will prevent you from seeking e-book publication deals with other publishers.  Take your time, weigh your options carefully.

As always, if you need help evaluating the terms of your existing Random House or HarperCollins contract to see whether it contains a more favorable e-book royalty rate or whether you granted e-book rights to those publishers in the first place, send in your contracts.  We’re here to help.