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Writing Excuses 9.40: Understanding Royalties with Paul Stevens

Writing Excuses 9.40: Understanding Royalties with Paul Stevens

From http://www.writingexcuses.com/2014/09/28/writing-excuses-9-40-understanding-how-royalties-work/

Key Points: Royalties are basically a percentage of the list price of physical books sold to a bookstore. Hardcovers are usually 10% of list price for 0-5000 copies, 12.5% for 5000-10,000 copies, and 15% above that. TPB is 6-8%, usually graduated, perhaps 7% to 25,000, 8% above that. Mass Market paperbacks are usually 8% to 100,000 or 150,000 and 10% above that. Ebooks and audio are usually 25% of net amount received. Discounts on physical books usually don't change the royalties, discounts on ebooks do reduce the net. Advances are paid to an author, usually in two or more pieces, on signing and on delivery of the manuscript. Advances are money loaned against earnings. Earning out means enough copies are sold so the royalties cover the advances.  Royalty statements are a snapshot as of a certain date and include copies sold, returns, reserve against returns. The author gets the most in their pocket from a hardback, but good recommendations are worth more. Early purchases (first week, first eight weeks) are also important to set the bookstore's expectations.

[Mary] Season nine, episode 40.
[Brandon] This is Writing Excuses, understanding how royalties work.
[Howard] 15 minutes long.
[Mary] Because you're in a hurry.
[Dan] And we're not that smart.
[Brandon] I'm Brandon.
[Dan] I'm Dan.
[Mary] I'm Mary.
[Howard] I'm Howard.
[Brandon] Our special guest star this time is Paul Stevens, an editor at Tor Books. What's your actual title?
[Paul] It is actually editor.
[Brandon] Editor, good. Paul is a fantastic editor. I have worked with him quite a bit. Dan has, as well. He helps us out when Moshe, who's bipolar, is sometimes hard to get a hold of. Paul becomes our in-house man.
[Dan] Paul did almost all of the work on Hollow City, which was fantastic.
[Howard] And it won an award.

[Brandon] The reason we're going to be talking about royalties here is because at our Writing Excuses retreat, the royalty discussion was one of the most popular and interesting ones we did. We realized we've never done something like this on Writing Excuses. So, Paul is the Tor in-house expert on royalties.
[Paul] I'm the in-house editorial expert, I would say. Basically price... Royalty statements go out twice a year. So a few months before, we get two gigantic boxes of draft royalty statements that we are supposed to go through.
[Howard] On paper?
[Paul] On paper. Yes.
[Dan] They come in a horse-drawn carriage.
[Mary] With a buggy whip.

[Brandon] Paul, what is a royalty statement?
[Paul] A royalty statement... Basically, when books get sold at a bookstore, the bookstores will... Well, actually, we sell books, generally, to the bookstore, and then they sell the book on. So of that money that we get when we sold the physical book to the bookstore, the author gets a portion of it. That's their royalties.
[Brandon] Normally, it's a percentage of cover price on a hardcover.
[Paul] Yes, percentage of list price.
[Brandon] On a physical book, I mean.
[Paul] On physical books. There's a few different ways it's calculated. On... I can give you some examples. On physical books, for example, the hardcover... The standard is 10% of the list price. So if you have a $25 book, that's $2.50 per book for the first 5000 copies of the book. Once you sell more than 5000, the royalty rate goes up to 12.5% for the next 5000. Once you hit 10,000, the royalty rate goes up to 15% for everything beyond that. So you... That kind of adds up. For trade paperback, because the cover price is lower, the royalty rate is a little lower, it's between six and 8%, but also it will generally be graduated like that. It'll be a certain percentage, say 7% to 25,000, and then 8% from then on. Mass-market, those little paperbacks, those are usually around eight and 10%. Eight to 150,000 or 100,000, and then 10% after. There's a... When we negotiate the contract, there's a little bit of wiggle room on some of them. Hardcover generally not, but trade paper, mass-market...
[Brandon] I would say this is one of the things I realized, there's less wiggle room there than a lot of other places. Like what you just described are basically my royalty rates. I'm one of the best-selling authors at Tor. I don't know of many people who have royalty rates that are not that. I've heard rumors that Lucas gets like 22%, or LucasArts did on Star Wars books, and that's like unheard of or something like that. But normal authors who are not George Lucas... 15% is basically on hardcovers, with the same escalator you just mentioned is what I'm getting, it's what Robert Jordan, I think, was getting, it's what basically everybody's getting.

[Paul] I think that's pretty industry-standard. Then there's other ways of calculating. Those are on the list price of the book. So... 14.95, you get 8% of 14.95 for each copy. There's some that are basically a percent of the net amount received. E-books work that way. Our e-book is 25% of the net amount received. Audiobooks are... There's a couple different escalators there. But audio and certain things like that are you get a percentage of the net amount the publisher gets.
[Mary] I want to jump in briefly, because a lot of people have a misunderstanding about net, because there's this thing called Hollywood accounting. In Hollywood, what will happen is that you are receiving X percentage of net. Which means that they will sit there and say, "Well, we had to pay this much for lighting, and we had to pay this much for that, and we had to pay this much for this." By the time they finish all of that, there is absolutely no money to give to the creator.
[Brandon] There was nothing netted.
[Howard] Hollywood contracts where you're getting paid on net are contracts where you are not getting paid.
[Mary] Net amount received means they're paying you on the actual money that they received.

[Brandon] This is the big difference right now in e-books and physical books, is that if the bookstore discounts the physical, within certain thresholds, you still earn the same amount. That's the bookstore saying, "Well, we bought the book from Tor for 12 bucks, the cover price is 25 bucks. We can knock it down to 14 bucks on a sale, still make a couple bucks." Tor still makes the exact same amount on that, and you still make the same amount on that. The e-book, when Amazon comes in or Barnes & Noble and says, "Hey, we want to run a discount on this. We're dropping the price." That actually changes the net that you make... That the publisher makes, and the amount that you make. So discounting an e-book actually makes you less money per copy, but because of the impulse buys, a good discount on e-books can just... Can make you way more.
[Paul] You make it up by volume there. Basically, when we buy a book, we pay... We generally pay an author advance on their earnings. So say I want to pay an author... I negotiate and we agree to pay an author $10,000 for their book. Usually we'll... They won't get a check for $10,000. It'll get split up. They'll get half of it when they sign the contract, and the other half when they finish their manuscript and turn it in, when it's delivered and accepted. So it's a little carrot we like to keep...
[Howard?] Keep writing. Keep writing.
[Paul] You don't get this...
[Brandon] The bigger an author you get, the more they will split that into chunks.
[Unidentified] The bigger the amount is...
[Brandon] You're on thirds? I think I'm on fourths on the Stormlight books.
[Paul] There's a reason for that. Because we're... Okay, we sign a contract, and say the author is going to take 6 to 9 months to finish the book, and then there's probably about a year between when the book is finished before it goes on pub. We don't start seeing any money coming in until at least 30 or 60 days after the book actually goes on pub. So we're actually loaning this money out. So that's... When you have a very large advance, if we're talking seven figures, we... It's not really good business sense for us to loan out that much money with knowing that... Especially on a multiple book contract, when book 3 or four is going to be three, four, five years down the road, we have to kind of tie those payments into when the income is actually going to be coming into us.
[Brandon] Here's a weird thing that happened with mine that people may find interesting. One of the big things we did on the Stormlight Archive books is we were not sure yet how big the series was going to be. You will often have this with your negotiations with an editor, where you're sure it's going to be really big, and the others are sure it's going to be moderately big, but they don't necessarily want to pay for what it would... Anyway, so there's a lot of discussion. My advance, actually, we have it break down on the best seller placement. So what happens is I get one chunk on signing, one chunk on turn in, one chunk on publication of the hardcover, one chunk on best seller placement of the hardcover. The highest it places, like how it places for a given week, we get another chunk of money. So if we get number one, we get this. So I don't actually know what my advances are. Well, I now know because they will hit number one. But when we signed the contract, we weren't sure where... What the actual advances would be on my books, because we tied it to the best seller placement.
[Paul] Bestseller... We do that for a number of authors. Basically it's exactly as you said. If you hit number one on the New York Times, you get an additional advance of X amount of money. If you hit number 10, you get an additional advance of this amount. It's a little bit more. Then we basically say... So, say you stay on the bestseller list for a year. We have to put a cap on the amount of money you can earn cash...
[Laughter]

[Paul] But... It's... If you're hitting the New York Times bestseller list, we're happy to give you this advance. We're happy that the books work, we're happy that... You're happy. The interesting thing about advances, and part of the reason that publishers don't want to pay super huge large advances when we're not sure is say, okay, we pay $100,000 for a book. We're so excited about it. It goes out. The only person who buys the book is the author's mother. So that author has earned $2.50 on that book. The advance we've given him, this $100,000... If it doesn't earn out, which I guess I'll talk about in a second, they don't return that money to us. That's basically a loss. That's why we really try to gauge the amount of the advance on what we really think the book is going to earn within a reasonable amount of time, a year or two years.
[Brandon] Well, there's something else really interesting on this, which is advances play into expectations, but then they also can actually ruin the feeling of a book. I'm not explaining this well. Let's say you have two books that both end up selling let's say 10,000 copies in hardcover. Now, if the advance on one of them was $20,000, then the author, assuming that it's a $25 book, has just earned out and earned money on the hardcover and everyone's happy. If the advance on the other one was, let's say, just $40,000. That book's probably still going to earn out in its paperback. In the end, after three years, both of these authors will have earned the exact same amount of money, nobody had unearned advance, but the person who has earned out their advance looks better, for some reason, than the person who didn't earn out their advance quite as quickly and things like this. So it can be this sort of self-fulfilling sort of thing, where getting the right advance, where it pushes you all to try and stretch for it... The numbers I gave are probably the wrong numbers, but...
[Paul] It needs to be a much larger...
[Brandon] Yeah, a much larger number.
[Paul] Like, "Oh, we took a bath of $60,000 on this. That's not good." So...
[Brandon] So, two books that sell the same number of copies and print the same number of copies can have widely different perspectives based on expectations.
[Paul] Yeah. Unearned advance is basically a loss for us. It comes out of our bottom line.

[Brandon] We need to stop for our book of the week. Paul, you were going to pitch one of the books by the author... By one of your authors.
[Paul] Alex Bledsoe is an author I've been working with for quite a while. He has a number of different series, and this series is called the Tufa. T-U-F-A. It's basically about a group of... Basically they're Celtic warrior fairies that have been living in Appalachia and their magic is in their music. It's a really hard book to describe, but it's absolutely awesome and wonderful and I love it. It is called The Hum and the Shiver.
[Mary] I will second that. It's a really great book.
[Howard] The Hum and the Shiver by...
[Paul] Alex Bledsoe.
[Howard] The Hum and the Shiver by Alex Bledsoe. Head out to audiblepodcast.com/excuse, pick up... Well, start a 30-day free trial membership and get a copy for free. You know who the narrator is on that?
[Paul] Stefan Rudnicki and... There's another. There's a woman on it and I'm sorry, I can't remember her name.
[Howard] Well, it will be on the links.
[Paul] It will be on the links. Sorry about that.
[Howard] No, no.

[Howard] Hey, I've got a question for you, Paul. When we talked about the large advances, I... I was in the record production industry decades ago. One of the things we were told was that when the band, or in this case the author, receives a huge advance, in part what that represents is a commitment on the publisher to do everything they can to make that money back. How much... Is that the case? I mean, if there's an author who's getting a $5000 advance and an author who's getting a $50,000 advance... Is somebody who's doing the marketing or the publicity or the bookkeeping at Tor looking at those two and saying, "Boy, I need to throw... I need to throw money at the $50,000 advance publicity campaign or we're going to take a bath?"
[Paul] It would actually... That decision would have already been made. Because I would not be able to pay a $50,000 advance without the reasonable expectation that we are going to sell that many copies and have that level of push for the book. So if I... It's rare that I would come in and have a... Surprise everyone that I paid $100,000 for a book. They would already have heard about this book and they would already... That level of enthusiasm would already be there before I could even...
[Howard] Okay. So what I was describing was the tail wagging the dog, and that's not the way it works.
[Paul] Not necessarily, no.

[Dan] Okay. I think we need to let everyone know what earning out actually means. So why don't you tell us about that?
[Paul] Earning out basically... Okay, let's talk about our hypothetical $10,000 advance. So we've already determined that if for some reason, you only sell 100 copies of the book, and the book earns 200... er, 2000... Where's my math? $2500, you don't return that other $7500. That book has not earned out. But when the book has sold enough copies or sub-right sales... I don't know if that's something we want to talk about later if there's time to... To basically earn $10,000 in royalties. Anything beyond $10,000, then the author starts getting more checks. So they'll start getting... Say the book ends up earning 12,000, they will eventually get another $2,000 in checks. If it keeps selling and selling and selling, then every six months, they will keep getting more income.

[Brandon] These royalty statements can be really kind of hard to figure out. The first one that I got made my head spin.
[Mary] Yeah. Mine still... It takes me... Because I only see them every six months, so I have to sit there and remember how to read it.
[Paul] Basically, what I... I didn't understand them either, and they basically dropped these things on us and said, "Now, look for anything that doesn't look good... That doesn't look right." But nobody had ever told us what they... What they were supposed to look like. You ask questions... "Well, just flag anything that doesn't look right." So we actually had to go through the statement line by line and redo the math. And say... Basically understand how everything was calculated and how everything fed through, to understand how the statement was put together before I really understood what all was going on.
[Howard] So kids, if you want to be an editor, don't drop your math classes.
[Laughter]
[Paul] Well, my first job out of college, I was an investment banker for about four years.
[Brandon] You poor soul.
[Paul] Not a fun... Not a fun job, but it was also... I learned a lot. So I think that's why I knew...
[Howard] Well, you knew how to stack all those zeroes and put the commas in the right places, so...
[Paul] Well, it's funny, because in the banks and banking investment job, I was in charge of like $32 billion. Now I can't... I can sign off on like $50, if that much.
[Brandon] So you'll get this royalty statement, and it'll list copies sold, but it will also...
[Paul] It lists returns.
[Brandon] It lists returns, and a thing called a reserve against returns.

[Paul] Right. Well, basically, the royalty statement is a snapshot at December 31st or June 30th. So, say your book publishes in January. That means we ship out all your copies to the bookstore in December. So take your snapshot at December 31st, it looks like we've sold 25,000 copies of your book. Because that's what we've shipped to the bookstores. As far as that snapshot is concerned, that's what you sold. They... So the system thinks, "Oh, we need to pay him based on the sales of 25,000." So your book goes on sale in January. Books are eternal. If the bookstore doesn't sell it, they send it back to us and they get full credit. That's why we get the returns. So basically what we have to do on these 25,000 sales, we have to hold back a portion of that amount in anticipation of returns of these books, unsold books being returned for [garbled]
[Howard] You didn't really sell all of them.
[Paul] That's correct.
[Brandon] Well, we did. We sold them to the bookstore, but the bookstore can always refund. So they will hold a certain amount of money, based on what their reserve... They think it is. Now, nicely, we live in an era where it's much easier than when I started in this to know how much is selling. Bookscan is a lot more accessible to authors...
[Mary] Although Bookscan does not show a complete picture.
[Brandon] No, it doesn't show a complete picture, but you can, at least, say every one on Bookscan is a book sold. Right. You can look on Bookscan and say, "In the last month..." Bookscan is like the Nielsen ratings, and it's point-of-sale. So if it says 7000 copies have sold, you have sold more than 7000, but you haven't sold less than 7000. So you can look at your royalty statement and you can look at Bookscan and you can know that you've sold this amount. Most e-books... Returns on e-books are very small. They do happen, like out of every 1000, you'll get like two people who decide to return it for whatever reason. It doesn't really happen that much. So you can see direct e-book sales and Bookscan sales, and you can get a much better picture of exactly what your book is selling. So the reserves can actually be much smaller than they used to be, because there was this sense that, "What if next month, they all come back? We have no idea if they will." We can watch Bookscan a lot more easily.
[Paul] Also, reserves are basically... They're held... They're calculated on each edition of the book. So a hardcover will have a reserve that will get smaller over time. Then when it comes out in trade paperback or mass-market, it'll hold the reserve on that ISBN. But things that are generally not returnable, e-books, audible downloads, those sorts of things, we don't calculate a reserve on those ISBNs. They just flow straight through.

[Mary] So one of the questions that I get asked a lot is, people will say, "How should I be buying your books to benefit you most?" So what is... When readers go to buy a book, how do they buy it to best benefit the author?
[Paul] To put the most money in your pocket?
[Mary] That's basically what they're asking.
[Paul] The hardcover would be the... Put the most money in your pocket immediately. Then it goes... Probably trade paperback. The e-book will depend on the e-book price, because our e-book pricing is tied to what the current print edition is in. So, generally, the print edition, but also the... Once you start getting into the mass-market, I think e-books are fine there too. I would have to like write it all down and do all the math to tell you for sure. But if the hardcovers are still available, and they want to put the most money in your pocket, definitely hardcover.
[Brandon] I would say... I always respond to these people by saying, "That's awesome that you want to help me out. If you really want to help me out, loan your book to your friend." Because as we spoke about with Patty on the publicity one, word-of-mouth is what sells books. So a good recommendation to a friend actually will probably make me more money in the long run than whatever you decide to buy, hardcover versus e-book or something like that. The other thing that is a factor here is first week sales are way more important than other week sales because that determines reorders, it determines whether the bookstore is willing to continue giving you co-op, which is where they place it in the stores, it determines bestseller lists and things like that, which is kind of a weird thing.

[Paul] The first 6 to 8 weeks are the most critical, because that's... After that is when stores will start looking at titles to start returning. Then, when they go to order your next book, the kind of make their buying decision based on what their sales had been in the first eight weeks. They'll temper it on did the book continue to sell after that. They'll adjust it. But their main concern... "Oh, we sold this many in the first eight weeks, so I'm going to take around that amount, maybe an additional 20%."

[Brandon] We are out of time. I would like to thank Paul Stevens, and I would like to make Dan give us a writing prompt.
[Dan] Okay. Well, I will give you a writing prompt.
[Brandon] I warned you ahead of time this time.
[Dan] I know.
[Brandon] I remembered.
[Dan] I thought of a good one. This happened yesterday, I thought of a great one, and then I forgot what it was. I...
[Laughter]
[Dan] I get so interested listening to the guest, I don't even talk on the show. I'm just like, "Yes, Paul, tell me everything about this because it's rad."
[Mary] I will give you a writing prompt.
[Dan] Oh, thank you.
[Mary] Your writing prompt is to write the writing prompt that Dan Wells should have given you.
[Laughter]
[Dan] If you write the actual one I thought of and forgot, then we need to have a conversation, because that's creepy.
[Brandon] Thank you, Westercon. I forgot to mention, we're recording live. So thank you, guys.
[Screams]
[Brandon] This has been Writing Excuses. You're out of excuses, now go write.
[Applause]
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