From Shawn Coyn via Steven Pressfield:
[W]hen the largest English Language publishers in the world came calling in March 2012, Ms. James (a pseudonym for a former British television producer named Erika Leonard) and her agent Valerie Hoskins decided to hear them out. If a big publisher were to take over the production of the paperbacks, the price would surely fall, the availability of the books would be radically improved and thus more people would be able to afford and find them.
The Executive Vice President and Publisher Anne Messitte at Vintage, a paperback division of Random House, made the most compelling argument. So Ms. James decided to sign over the paperback publishing rights to her works to Vintage for that magical phrase…the seven figure advance.
But there was catch. In order to cash the $1,000,000 check, Ms. James would have to sign over not just the paperback rights, but all rights, including eBook rights.
Let me assure you that Vintage did not pull a fast one here. It was not the only publisher interested in the books and I can safely say (although I was in no way privy to any of these negotiations) that every single big six publisher that Ms. James met insisted that she turn over eBook rights—including Random House’s rival Simon & Schuster.
No eBook rights, no deal. It was a line in the sand that none of the Big Six were willing to cross in March 2012 . . . Just 8 and a half months ago. If E.L. James wanted a big six publisher to publish her books, she had to give them her eBooks too.
A case study of the numbers involved with the Fifty Shades trilogy, though, reveals just how expensive it was for Ms. James to agree to these terms. I wonder how many more bestselling self-published writers will be willing to play by them in the future . . . I can guarantee far fewer after other news that was practically ignored by big media from this past Wednesday . . . more on that below.
. . . .
Here is the math for the Fifty Shades of Grey trilogy.
Estimated total units sold in 2012 (from numerous reports): 35,000,000.
I’m going to assume that 50% of those units were sold as eBooks. My gut is that the percentage of eBooks sold is far higher than that. Early in the heated selling climate just after RH/Vintage took over, Amazon.com reported that the trilogy eBooks were selling at a rate six times as much as the paperbacks. But to be conservative, for the sake of argument let’s just say 17,500,000 eBooks were sold and 17,500,000 physical copies were sold.
How much money did they make for Random House/Vintage versus E.L. James?
. . . .
The paperback revenue ($140,000,000) minus the $40,000,000 in production, warehousing and shipping costs (20,000,000 copies x $2.00) leaves $100,000,000 of net revenue to Random House.
But Random House/Vintage has to pay the author too. They don’t get to keep all of that pot for themselves.
. . . .
So Random House/Vintage’s conservative net profit on just the sale of 17,500,000 paperbacks is:
E.L. James’ share is:
I’d argue that that distribution of income is fair given the fact that Random House/Vintage dealt with an extraordinary number of variables to bring the books to the marketplace.
But that’s not all of the revenue . . . we now have to look at the revenue generated by eBook sales.
The eBooks retail for $9.99, which is the same price as the original The Writers Coffee Shop version that sold 250,000 units. Random House/Vintage sells the eBook under the agency model and collects 70% of all revenue from the sale of the $9.99 book, or $7.00 a unit. The remaining 30% goes to the retailer.
So the total amount of revenue generated by 17,500,000 eBook copies sold is (17,500,000 x $7.00) $122,500,000.
. . . .
The standard royalty rate for eBook from the big six publishers is (ahem) 25% of net dollars received. It’s hard not to believe that there is not some sort of gentleman’s agreement among the big six in place about not breaking this barrier. I’m not saying that the six heads got together and shook hands on it. I’m saying that they didn’t have to.
So E.L. James received 25% of $122,000,000 or $30,500,000 of the eBook revenue pool.
Random House/Vintage on the other hand received $91,500,000 of net revenue for that same sale of eBooks.
So the totals for the 35,000,000 copies sold are:
Random House/Vintage: $163,500,000 net profit
E.L. James: $58,500,000 in royalties
Now, let’s add up what Random House/Vintage brought to the table to earn almost 3 times as much money on the sale of E.L. James’ work than she earned.
A new jacket? No. Random House/Vintage wisely used the same cover art that made the books number one bestsellers before they took over the franchise.
New publicity? Not really. All of the publicity generated by Fifty Shades was pretty much in the works before RH/Vintage took over. In fact, all subsequent ink is devoted to how successful the books are more than anything else. I doubt that Vintage had to expend more than 100 hours of a single publicist’s time managing this campaign.
. . . .
Can an argument be made that without Random House/Vintage the trilogy would not have become the sensation that it became? If there weren’t stacks and stacks of paperbacks at Barnes & Noble, the book would just not have done as well. I think that’s true.
For fun, let’s say we take away 75% of the volume of sale of the trilogy to offset the loss of Random House/Vintage. That is, even though Fifty Shades of Grey was a number one New York Times bestseller without the help of Random House/Vintage, it never hit full throttle velocity and sold just a quarter as well. And because the paperback situation never got sorted out, it only sold in eBook.
So instead of 35,000,000 copies sold, it sold 8,750,000. Only in eBook.
In this case E.L. James would receive $61,250,000. Instead of $1.75 a unit (25% of the $7.00 RH/Vintage received from eBook retailers), she’d receive the full 70% of retail cover price eBook revenue or $7.00 a unit times 8,750,000.
Without doing the deal at RH/Vintage, E.L. James would have made $2,625,000 more selling just 25% of the 35,000,000 she sold with Random House/Vintage.
. . . .
If E.L. James just sold the physical paperback rights to Random House/Vintage and kept the eBook rights for herself, Random House/Vintage would have made $72,000,000 . . .
$72,000,000 represents an entire year’s worth of profit for a Big Six publisher.
$72,000,000 is even enough to cover generous $5,000 bonuses for 5343 employees (approx $27,000,000) with quite a bit of net profit in to the coffers left over too.
How do I know that Simon & Schuster did this math?
Because they just did a deal with agent Kristin Nelson and her client Hugh Howey. Howey wrote and self published books in yet another bestselling series called Wool. Howey hasn’t sold 250,000 eBooks like E.L. James did on her own though. He’s sold 300,000.
Simon & Schuster ceded eBook rights entirely to Howey and agreed to just publish hardcover and paperback copies.
You’d think that the 1100 online news sources that covered the generous Random House bonus story would be all over this Hugh Howey story right? I just did another Google search for the Hugh Howey deal and got 36 hits. So no . . . few people understand this development for what it really is.
. . . .
This physical copy only deal is a game changer. It’s nothing short of revolutionary.
Think about it. Simon and Schuster didn’t raise the eBook royalty for Hugh Howey from 25% to 30% of net receipts to lure him to do a deal with them. They didn’t even go to 50%. They walked away from eBook entirely.
There are any number of reasons why S&S did this deal (not the least of which is that CBS is probably in the middle of negotiations with News Corp. to sell them). But one reason makes the most sense. Someone at Simon & Schuster sees the future (I’m pretty sure I know who).
And the future is in the hands of long tail business creators who have the foresight to take the advice “forget the myths . . . follow the money” as seriously as they do their craft.
Link to the rest at Steven Pressfield and thanks to Sean for the tip.