The Growing Importance of Intellectual Property

31 January 2019

From Kristine Kathryn Rusch:

I need to be clear as I start this post. We writers create intellectual property. We license our copyrights. We do not sell stories. In fact, the stories we tell, along with their titles, are often not copyrightable. The form in which we tell that story—the order of the events, the order of the words we use,—those things are copyrightable, but the basic boy meets girl, boy loses girl, girl discovers she’s fine on her own storyline can and does fuel a thousand books and movies. (That’s why so many memes over the holiday season made fun of the romance movies on Hallmark. Because the movies—all copyrighted in their own right, all different in the copyright sense—share a lot in common.)

If you don’t understand copyright and you consider yourself a professional writer, then you do not understand the business you are in. If you have published a novel, traditionally or indie, and you do not understand copyright, you are volunteering to get screwed over and over and over again. I say this often, and I’m saying it loudly again, because the trend for 2019 and beyond is that every organization you do business with will try to take a piece (if not all) of your copyright on each and every one of your projects.

Your job is to protect that copyright.

. . . .

Forbes actually published an article in fall of 2018 titled “What Authors Should Do When Their Publisher Closes.” You can click over there if you want. The advice isn’t good, because as someone in the article says, what an author should do varies based on the author’s contract. And if the author has an agent, then they’re probably screwed. If the author doesn’t understand copyright, then they’re definitely screwed.

. . . .

I recommend publishing indie, because that’s the best way to protect yourself and your writing income. You’ll have a career if you do that. Your career might vanish on you if you try to remain traditional. Or, rather, you will write as a “hobby” while you make your living doing something else.

Yes, I’m being harsh, but that’s because the intellectual property apocalypse that I’ve been warning you about is upon us. The trends are there, and the signs that traditional publishing (and all of the other big entertainment organizations) know about the value of intellectual property are becoming clearer and clearer.

. . . .

For years now, the Big 5 traditional publishers have had contracts that essentially transfer the entire copyright of a novel from the author to them. The contracts don’t say that explicitly, but when you read the contract as a complete document (which is how you should read it), you realize that the sum total of what the clauses mean is that the writer retains no part of the copyright, and is only entitled to a tiny percentage of the money that copyright earns.

The reason these contracts changed about a decade ago had nothing to do with publishing and everything to do with mergers. As these publishing companies became part of big international conglomerates, many of them entertainmentconglomerates, the legal teams redrafted the contracts to do the copyright grabs.

Most writers had no idea what they were signing, and most of their agents didn’t either. Agents are not trained lawyers. A handful of the big agencies have lawyers on staff, but most of those agencies are concerned with making the agency money, not with making the writer money. So a lot of the contracts are structured to pay and protect the agent, while bilking the writer.

. . . .

Up until a year or so ago, most of the Big Five continued to operate like traditional publishing companies have since the 1990s—a focus on publishing a lot of titles, hoping that some will stick and become bestsellers. But that strategy isn’t working, and sales are down precipitously.

. . . .

[Simon & Schuster] has been in a media conglomerate since the 1980s. I’m not going to go through its tortured history, which runs from Paramount to Viacom and beyond, but realize this: It became part of the CBS Corporation officially in 2005. Around then, it became impossible to get book rights reverted, which is one of the tricks that is recommended for writers in the Forbes article I cited above. (How 1995. Sigh.)

S&S has experimented with electronic books since the 1990s. Dean and I personally made a lot of money in the early 2000s when S&S realized they hadn’t licensed e-rights for Star Trek books. (Dean and I wrote a bunch of them in the 1990s). S&S has tried to have a self-publishing arm since 2012, and they’re doing a lot of things that require writers to pay for services that publishers used to provide.

. . . .

The more IP a company acquires, the more its value goes up. Even if they don’t create anything from that IP. Acquiring a novel’s copyright—with all its potential spinoffs, TV shows, toys, comics—increases a company’s value tremendously.

Read that paragraph again, because the information therein is the key to this whole piece.

The more IP a company acquires, the more its value goes up. Your novel is IP. If they acquire it, their bottom line goes up, even if they never do anything with that IP. Got that?

That’s why S&S stopped, in 2000 or so, reverting the rights to the novels they acquired. Those novels equal more earnings potential—and they allow the company to maintain a value that it wouldn’t have otherwise.

I’ve been warning writers about this copyright grab by corporations for some time, but it was easy to ignore me because the Big 5 have not been (for the most part) exploiting (the legal term for developing or making use of) that copyright.

S&S finally is. That’s what Simon & Schuster’s CEO Carolyn Reidy’s heady year-end report was really all about. She called 2018 “the most successful year in Simon & Schuster’s history,” and yet she didn’t cite a single print bestseller as something that caused the success.

Instead, she touted the rise in audio . . . as well as a mention that sent a little shiver through me.

She wrote:

…[backlist sales now] comprise a higher portion of our revenue than at any time in memory…while readers wanting the tried and true is an industry-wide phenomenon, our concerted effort during the last few years to acquire books with the potential for long-term backlist sales has yielded dividends.

This article does not specify what exactly she means by “backlist sales.” Does she mean actual ebook and print sales, or other licensing, such as foreign rights and so on? Clearly S&S is exploiting the audio rights clauses in their contracts.

What is clear, however, is that a big traditional publisher has finally figured out that not only does their backlist have value in raising the company’s worth, but it also has earnings potential that can be exploited in 2019.

Why does this send a chill through me? Because if one traditional publisher learns it, the others will learn it as well. And the ability of writers who have sold their work into traditional publishers to get the rights reverted will go down to almost nil.

Big traditional publishers will finally join their counterparts in the entertainment industry—the movie/TV companies, the music studios, the game companies—in demanding control of every aspect of the copyright from the original author.

Which means that if an author signs one of those agreements, the author will get pennies on the dollar (if that) for any rights—audio, movie, TV—rather than the kind of earnings writers could have gotten as recently as 10 years ago.

. . . .

And those of you who licensed mass market rights a few years ago, thinking you’d get your ebooks into stores, you probably already signed away most of the copyright, particularly if you went with Harlequin or Simon & Schuster.

Link to the rest at Kristine Kathryn Rusch

Here’s a link to Kris Rusch’s books. If you like the thoughts Kris shares, you can show your appreciation by checking out her books.

As usual, Kris incorporates a lot of intelligent business thought and advice into the OP (and her other posts in this series).

As PG has mentioned before, he has negotiated, drafted and/or reviewed a great many contracts during his legal career, including some large technology copyright and patent licensing agreements. As he has also mentioned before, the typical contracts between authors and traditional publishers are some of the most unfair and one-sided agreements he has seen.

In a prior era during which it was impossible for an author’s works to reach any sort of meaningful audience without a publisher to cover the costs of printing books and provide meaningful access to buyers for large numbers of physical bookstores, perhaps the value of a publisher’s services was an extremely large portion of the income generated by sales of a book.

However, in an age in which:

  • Amazon is the largest English language bookseller in the world; and
  • Opens its electronic doors to self published authors on terms substantially equivalent to those it provides commercial publishers; and
  • Ebooks have the highest profit margin of any edition of a book a publisher sells; and
  • Ebook editing, formatting and cover design of a quality comparable to that provided by a commercial publisher can be had for a few hundred to a few thousand dollars;

the real value of a publisher for a typical author compared to the effective cost of a publisher to that author has declined precipitously.

PG was about to discuss the value of branding for either an ebook or a printed book, but he will be uncharacteristically brief.

Does anyone go to an online or offline bookstore seeking out a Random House book? Of course not. They’re looking for an author, a genre, etc.

With respect to promoting and selling books, which brand name is most valuable, James Patterson’s or Little, Brown and Company’s?

Without singling out any particular literary agent or agency, PG will say, as a general observation, that agents famous and obscure don’t do anything significant to improve the contract terms for publishing contracts other than increasing the amount of the advance on some occasions. In particular, agents rarely if ever do anything to address the issues Kris discusses in the OP.

In some types of contracts — consumer loans, for example — federal and/or state legislatures have passed laws that prevent commercial lenders from including some contract provisions that are unfair or harmful to borrowers. Compared to the number of individuals who take out loans to purchase a house, automobile or dishwasher, however, authors are a tiny constituency and elected officials have much bigger fish to fry than commercial publishers.

However, perhaps as a result of such consumer protections, some authors may believe they are somehow protected from  unfair provisions in publishing contracts between themselves and large publishers. That belief is incorrect.

Some of the most unfair provisions in a typical publishing contract are presented in the most innocuous manner imaginable.

 

 

Finally, there is nurturing. Publishers don’t just produce books. They nurture. Literary agents also provide nurturing in case publishers fall short in any way.

Like a baby duckling, a baby author needs to be nurtured and petted and encouraged and gently guided if she/he is to grow into a beautiful swan.

Who better to nurture such a delicate creature than a Kommanditgesellschaft auf Aktien headquartered in Gütersloh?

Off the top of his head, other than publishing, PG can’t ever remember ever having a business discussion that included the word nurture or any of its variants.

PG is reminded of a quote attributed to former president Harry S. Truman, “If you want a friend in Washington, buy a dog.”

PG suggests that if you want someone to watch over you, steer clear of the publishing business.

.



Contracts, Copyright/Intellectual Property, Kristine Kathryn Rusch, Legal Stuff, PG's Thoughts (such as they are), The Business of Writing

26 Comments to “The Growing Importance of Intellectual Property”

  1. And my non-writing friends and acquaintances keep asking me–over and over again–why I don’t try to get my books published by one of the big name houses.

    Yeah, no.

  2. There is one thing the big media companies (video, music, gaming) are doing that the BPHs haven’t (yet) copied: bulk licensing of the deep backlist. (The stuff that shows up on CRACKLE, PLUTO, IMDB FREEDIVE, HULU, NETFLIX, PRIME, etc.)

    I’m not sure how long they’ll ignore the money in subscription services. To paraphrase the IdiotPolitician™: “A million here, a million there and pretty soon it adds up to real money… ”

    A smart way might be to set up genre-specific services loaded up with ten/twenty year old stuff that isn’t selling much if at all. After all, the way the B&M shelf space is evaporating that IP won’t be generating much income.

    Sooner or later…

    • I would probably subscribe a SciFi fantasy subscription that had that. Assuming it provided me with most of the scifi/fantasy backlist titles controlled by the big five.

  3. A publishing contract is trade. One guy gives one thing, and the other guy gives something else. It hasn’t changed since our ancestors met down by the river and traded hides for flint knives.

    An author simply has to ask, “What am I giving this guy?” It’s not a partnership. It’s not an ecosystem. It’s not a joint venture. It’s a trade. What are you giving the guy for his flint knives?

    • More appropriately, shouldn’t it be “How magical are those beans, anyway?”

    • Meh. It IS a partnership when you are both trying to monetize something to a third party. This one is just historically one-sided, because trying to publish at scale was very difficult until this decade. Publishers had all the leverage, so they got whatever terms they wanted. Its a wonder things weren’t WORSE than they are now.

  4. I remember comparing, in my own mind, the worsening accounting shenanigans of trad pub to those in standard use in the movie biz. That seemed bad enough, but when I learned about IP squatting sometime last year, the bottom of the pit seemed to open, revealing new depths.

    Is legal theft (I’ll give you nothing for your something, well camouflaged, so you don’t realize it) really the only way for large international conglomerates to pursue business? Is there no place for an ethical pursuit of business?

    If there was one lesson both my parents took care to pound into me, it’s that it’s impossible to deal safely if the power differential between the two sides is too great. The high side just skins, and the low side gets stripped.

    Captain Vorpatril’s Alliance by Lois McMaster Bujold

    • Which is why the writer must read and understand the contract before signing – or hire a lawyer (not the agent) to explain it to them.

      If was you selling a car most trad-pub contracts would allow me (trad-pub) to cone up and say “You know, I think that car’s worth a cool million. Tell ya what, I’ll give you 2,000 to hold it for me.”

      For that small sum you find that you now can’t sell the car to anyone else, in the fine print you’ll also find you can’t try to sell any other cars without letting me have first offer on it. Oh, and you find you won’t get the rest of that million unless I actually decide to do more than hold onto the ‘option’ of buying your car.

      And trad-pub wonders why writers that aren’t already blind from drinking the kool-ade refuse to partake …

      • I’m perfectly content for publishers to offer any terms they want, and for authors to accept them if they choose.

        The market has expanded and offers all authors the opportunity to use Amazon KDP to reach the whole world.

        It’s reasonable to ask if authors who choose to sign publishing contracts with prevailing terms consider those contracts superior to Amazon KDP.

        KDP is a great deal. It pays 70% and makes a book available to zillions of people all over the world. If authors think publishers’ deals are even better, then that’s their business. I wish them luck.

        We may even find that those authors have values that differ from mine, and don’t care if I disagree with them. Maybe they don’t want to be like me, don’t care what I think they should do, and don’t value my approval.

  5. It’s not just audiobooks that the big publishers are turning into money. I get over half a dozen email newsletters each day that offer free and cheap ebooks. Early Bird Books now is completely big publisher backlist, and books by authors like Nora Roberts and the late Arthur Hailey are creeping slowly into the other lists. As this article says, ebooks are cheap to produce, and the publisher gets almost all the money. Add to this, these authors have a massive backlist, and it’s happy times for the publishers.

  6. Am I the only one who sees this as a scam to inflate the publishers’ stock prices?

    If I understand this correctly, the Manhattan Mafia (MM) are valuing their IP assets at market value as if that value had been realized. That’s like listing your inheritance from your great uncle as an asset on a loan application while the old bird is still alive. The MM are carrying potential values on their books as if they were actual.

    Can you say ‘creative accounting’? (I knew you could.)

    Remember WorldCom? Enron? Mortgage-backed securities, CDOs, and the sub-prime mortgage crisis that set off the depression of 2007? I am not saying that the collapse of the MM will reach those proportions but once the first one goes, the other dominoes will fall.

    Tell me I’m wrong. Please tell me I’m wrong.

    • R. L. Royall, Jr.

      You are not wrong. This is the Big 5 saying “we own X titles and when existing titles go well they make $Y million.” The fun part is when you realize that the $Y million is for blockbusters, but most of the IP they hold probably won’t even earn back its initial print run (like most titles).

      • That is not exactly true.
        Very few titles actually lose money for the BPHs. They may not “earn out” and pay the authors much in the way of short term royalties but most at least break even for the publisher.
        The few true money losers come from the political books and “seven figure” deals given to “surefire blockbusters” and those are few and far between.

        IP catalogs are all about the long tail, about reissues, and soon enough, about bulk licensing.

        Look to the video world, which has a much better handle on their own ongoing disruption: think of the value of one episode of GILLIGAN’S ISLAND or I LOVE LUCY. The stuff is old and has been on syndication for ages. But it will sooner or later be watched by somebody, somewhere and bring in a handful of ad views. Which means it has some non-zero value.

        Now, bundle all the seasons of the show with a few dozen other shows from the last sixty years of TV and a few dozen decent to good movies and you have something like Amazon’s FREEDIVE or WB’s CW SEED. A free streaming service feeding out 4-8 ads per hour to a few million viewers a year. Each ad view might individually be worth peanuts by Superbowl standards but its still cash. At the end of the year it all “ads” up. 😉

        That’s the power of bulk IP.
        That’s the value of deep backlist.
        Just because it isn’t being monetized today doesn’t mean it’s worthless. And bulk IP businesses aren’t unicorns; they’re all over and more are popping up like weeds. A lot of the ad money fleeing Facebook, Twitter, and even Google are heading there.

        A lot of folks aren’t paying attention to the bulk IP business model but the Hollywood guys sure are. ABC, NBC, FOX, and CW all have ad-supported streaming apps for phones, tablets, gaming consoles, and streaming hardware. SONY has CRACKLE, ROKU recently added a “channel” under their brand, Amazon just added FREEDIVE. PLUTO TV is a startup that’s been around for a couple of years that was just bought up for $340M by Viacom. Look at the FIRE TV apps list for hundreds of startup video services.

        https://www.amazon.com/s/ref=lp_10208590011_nr_n_14?fst=as%3Aoff&rh=n%3A2350149011%2Cn%3A%212445993011%2Cn%3A10208590011%2Cn%3A9408765011&bbn=10208590011&ie=UTF8&qid=1549038361&rnid=9209898011

        There is even more money to be made through paid subscription services. Disney has been mining 60 year old comics for years now through Marvel Unlimited, WarnerMedia’s DC UNIVERSE service has thousands of comics, dozens of movies and TV shows combined with new exclusive content. Disney is pulling most of its content from existing distribution channels to feed their own services, some ad-supported, some pure subscription, some mixed.

        The money comes from ads but the eyeballs come for the backlist.

        IP catalogs have inherent value.

        • The other thing is that you can never really tell when something in the backlist might explode without warning. The Handmaids tale won awards and was a consistent mid-list seller until it became a TV series and then slammed into the top of the best seller lists for weeks and weeks.

          • Philip K. Dick. Hollywood loves him.

            Asimov’s FOUNDATION series is a perennial seller but it could still explode if the upcoming streaming TV series is any good.

            And there’s no telling what new technologies might do for existing IPs. Sooner or later “AI” plus text to speech will lead to voice actor quality narration on the fly, dramatically dropping the cost of creating audiobooks. Or for that matter computerized translation will eventually get good enough for fiction translation. A lot of slow sellers could suddenly find entirely new audiences.

            Even without a sales spike, those 70+ years can add up to meaningful cash for most any single book, to say nothing of a tradpub catalog with tens of thousands of titles.

            One of the BPHs’ biggest advantages in negotiating publishing contracts is the short term thinking on the other side of the table.

    • The BPHs aren’t publicly owned companies.
      Any snow job they might be carrying out is just snowing the very overlords whose mandates are keeping them from fully monetizing their assets today.
      (Notice that the example cited by KKR as maximizing their backlist is the only American owned BPH.)

      However, a better metaphor for the paper value of BPH IP is energy companies’ oil reserves. The unit value of oil might go up or it might go down but the bulk value remains: more is still better.

    • It’s not just publishers participating in the inclusion of IP when calculating their assets. Financial institutions now recognize IP as having value, and a fairly high one at that.

      So other corporate entities that know nothing about publishing are buying up IP, because they can buy it cheap compared to how it is valued, so their assets grow. They have no intention of doing anything with the IP. They just squat on it to improve how their books look.

      If the new, high valuations persist, the phenomenon is likely to become a problem for smaller or newer indies with regards to estate planning.

      Say you are a new indie. You’ve published maybe a dozen books, but haven’t yet gotten traction in sales. You die.

      You have a properly set up your will, so your IP goes to your heirs as you wished it to.

      BUT, because of the new high valuations for IP, those books are considered to be worth a million apiece. Except they aren’t really selling worth beans yet. So how do the heirs pay the taxes due on them?

      • Yeah, that’s the part that has me worried…

      • There really is no “new high valuation.” Companies initiate a write-up if they see an advantage. A write-up can increase current earnings, increase current tax liability, generate a deferred tax liability, increase future depreciation write-offs, etc. The company has to work through all that to see if it is an advantage.

        You have to be able to justify the write-up, especially for intangibles. If a book isn’t selling well, there is no basis for telling the heirs the fair market value (FMV) is more than what its sales support.

        If the heirs did somehow get stuck with a high FMV on a book with poor sales, then they should jump for joy, and sell it as soon as they can. But, since nobody will pay the proposed FMV, it really isn’t a FMV.

        There is really nothing wong with what the publishers are doing. If a novel has been sitting on the books with very low sales, and a low valuation, then becomes a moderate seller in a new online market, it does indeed have an increased value.

        I would note that if this type of accounting is being used by the publishers, and they are getting away with it, they are lots smarter than many think.

  7. Most of my IT career was running small service companies whose customers were Fortune 500 firms, and I’ve managed hundreds of those contracts.

    It was never my experience that the tiny could not do business with the huge because of the disparity of their sizes. Instead, the giant firm’s business lead would generally take your side during a legal-language Ts and Cs discussion, because the numbers were small (from his perspective), the business goals were clear and agreed to, and the headache of a bad relationship wasn’t worth it. So the boilerplate “bad terms” were easy to excise on the grounds of reasonability and business goals.

    No, the Big 5 Publishing firms are in this, as in so much else, nothing like real businesses. Most importantly, they don’t have the practical ethics to present and defend fair and reasonable terms to their suppliers (authors). If a Fortune 500 firm gets bad-mouthed by a tiny services company, other people come to hear of it and there are (minor) consequences. If an author bad-mouths a publisher, no one knows or cares.

    • It was never my experience that the tiny could not do business with the huge…because the numbers were small (from his perspective), the business goals were clear and agreed to, and the headache of a bad relationship wasn’t worth it.

      That’s heartening. Thank you for sharing it.

    • I wonder… would this be because, whatever your clients were providing, a Fortune 500 company would usually need only one supplier of it? So if they didn’t already have a supplier, or were switching suppliers, they had a definite date by which the new supplier needed to be providing the service. If they were in negotiations with your client, they must be serious about doing a deal. If they tried to drive too hard a bargain, your client might walk away, and there mightn’t be time to find a replacement before the due date.

      Publishers, on the other hand, have many suppliers whose products are “the same” from the point of view of their accountants and lawyers. If a publishers releases 1000 titles a year, it’s easy to swap out any title whose author is demanding a deal that’s too much above the publisher’s standard.

      Then, too, I imagine most of your clients have more than one customer, so they wouldn’t feel the same pressure to accept a deal that heavily favours the customer that an author might have in negotiation with a publisher.

      • More of an attitude thing than a structural thing. Certainly, as you imply, I imagine Walmart treats its suppliers differently from its services companies.

        The point was in contradiction to “disparity in size” being the issue… I don’t think it is. I think it’s the disadvantageous position.

        Authors are to publishers what 3rd party lowest-cost suppliers are to Walmart… they’re plenty more where they came from. And the trendy political memoirs for which they overpay are more in the category of marketing/publicity than as suppliers.

  8. Your novel is IP. If they acquire it, their bottom line goes up, even if they never do anything with that IP. Got that?

    No, I don’t get it. Something has to change for the asset value to change. Buying something for $10, and doing nothing with it provides no basis for a write-up.

    Buying something for $10, then selling copies generating $1000 per year is a change, and can justify a write-up. That would demonstrate a change in fair market value. Putting a 1970 book online as an eBook, and making $1000 per year is a basis for a write-up. It’s a revenue stream that didn’t exist when the book was acquired.

    This stuff is not nearly as simple as presented.

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