Understanding eBook Royalties

Robert Murray

As publishers settle into a level of comfort with authors, distributors and retailers, a few trends can be identified that are worth bringing into the open.

One important trend for writers to know about is how author royalties for eBooks are evolving. To understand this trend, it’s important to first understand how eBooks are being distributed and sold today.

Two retail models are driving eBook sales today: the traditional wholesale model and the agent model. This article will cover the traditional wholesale model and next week we’ll be discussing the agency model.

For a representative example of the wholesale model, let’s look at Amazon. Similar to traditional retail deals, Amazon buys books (in the case of eBooks, the right to sell them) from a distributor at a price discounted from the physical book’s list price.

While some authors are able to secure publishing contracts that pay royalties based on retail prices, most author royalties are paid based on this discounted price, also called “net receipts” or “net revenues.”

But the fundamentals of this arrangement are dynamic. The interesting trend to watch here lies in the performance of the physical eBook platforms, such as Amazon’s Kindle, especially in relation to the content they need to remain viable consumer products.

Since a brisk eBook market is needed to support sales of Amazon’s Kindle hardware, Amazon currently chooses to sell many eBooks to the consumer at a price well below the discounted price they receive from the distributor—nominally taking a loss on each sale.

So how long can this price subsidy last? Will prices of physical books come down to meet those of the eBooks, or vice versa? How will authors fare? Will eBook royalties, which tend to outstrip physical book royalties by nearly 2:1, fall?

Stay tuned.

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