Source: JA Konrath blog, May 2012
Wholesale Paper Model: This is the general pricing model for paper books. On a hardcover book with a $25.00 price printed on the cover, at a 15% royalty based on cover price, the author made $3.75. The publisher sold the book to retailers at a 50% wholesale discount, and so collected $12.50 on each sale.
Of that $12.50, I estimate about $4.25 went to the costs of paper production–printing the books, boxing them, shipping them to warehouses, the distributor’s cut–leaving the publisher $4.50. So under the wholesale paper model, the author’s profit ($3.75) and the publisher’s profit ($4.50) on a standard $25.00 hardback book were pretty similar.
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Wholesale Digital Model: This is the original model the Big 6 used when they began selling ebooks. On an ebook with a $25.00 cover price, the publisher sold the book to retailers at a 50% wholesale discount (same as for paper), and collected $12.50. The author then received 25% of the net amount the publisher collected, so 25% of $12.50, which comes to $3.12. That left the publisher $9.38 ($12.50 minus the author’s $3.12.) In digital, there are no paper costs to deduct from the publisher’s share of net amounts collected from retailers. So the publisher went from making a little more than the author in paper to making almost triple in digital–for no justifiable reason other than greed.
Publishers like to say that an ebook costs as much to produce as a paper book. This is bullshit.
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If you’re wondering why you never saw a digital book selling for $25.00, it’s because the ebooks you see on Amazon and elsewhere are usually heavily discounted from cover price, just like paper books are. My guess is publishers knew Amazon would discount a $25.00 ebook, but not as drastically as Amazon did, in some cases selling under wholesale cost. This frightened publishers, who wanted to have some control over the selling price because it protected their paper sales where they had a quasi-monopoly. So the publishers (allegedly) colluded to make Amazon accept the Agency model.
The important thing for authors to remember, though, is that the publisher made $9.38 on wholesale whether Amazon or any other retailer charged customers $25, $15, $10, or $5 for a digital book, because no matter what the retailer charged, the publisher always collected 50% of cover price, and the author’s cut was always 25% of what the publisher collected.
So the wholesale ebook model may look like the wholesale paper model, but somehow the publisher makes almost triple what it did before. It did raise author royalties slightly (from 15% to 25%) but hardly enough to justify the extra money its making.
Agency Model: For comparison’s sake, let’s look at how much an author would make on a $25.00 ebook under the agency model. Under the agency model, the publisher sets the actual retail price for the retailer, and collects from the retailer 70% of that set retail price. The author then receives 25% of the net amount the publisher collects. So, with a $25.00 ebook under the agency model, the publisher collects 70% of the $25.00 from Amazon, or $17.50, of which the author gets a 25% cut, or $4.38, leaving the publisher $13.12.
But I haven’t seen any $25 ebooks under either pricing model. The price publishers seem to be trying to enforce for new front list ebooks is $12.99, sometimes as high as $14.99. For a $14.99 agency-priced digital book, the publisher collects $10.50, of which the author gets $2.62 and the publisher keeps $7.87. At a $12.99 price point, the publisher collects $9.10, of which the author gets $2.28 and the publisher keeps $6.82.
Under the wholesale model, an ebook that retailed for $9.99 was earning the author $3.12. Under the agency model, an ebook that retails for $9.99 earns the author $1.75.
Do you see now why the wholesale digital model was so much better for authors? Publishers switched to a model (and apparently colluded to do so) in which authors, agents, and publishers all make less money than they made under wholesale–with publishers taking a dramatically bigger slice of the shrunken agency pie.