Random House Avoids Apple iPad to Keep Authors in the Dark

My colleague Damon Brown wrote about Random House's iPad stall tactics. The company is resisting the Apple (AAPL) sales contract as something that will upend business-as-usual and hurt its authors. Damon says that the action will actually hurt its authors anyway and is ultimately futile. I agree, but don't think Random is afraid of lower prices. Instead, like many publishers, the company fears that clear sales numbers might give authors access to information they're not supposed to see.

On the surface, Random's claim that the agency model offers some special danger to book pricing seems puzzling. For decades, all publishers have sold books to retailers at a discount from list price. Under that arrangement, stores and online sellers purchase copies -- with better pricing depending on volume -- and then sell at whatever price they wanted. Because many charge consumers less than list price, the result effectively lowers perceived book prices and value.

To sell via Apple under the agency model means setting a list price and giving up 30 percent. The list price is fixed; therefore, there is no price degradation and the publishers actually make more per electronic copy than they would with Amazon (AMZN), which takes 65 percent of the list price.

Why, then, is Random supposedly worried about agency pricing? To understand this, you have to delve into publishing dynamics for a moment. The fundamental business arrangement is that authors write books for publishers who, in turn, pay the author for exclusive publishing rights and then sell the book to retailers. The author gets royalties from the books sales, often getting an up-front advance against future royalties. (Disclosure: I've written several books for a Random House imprint, as well as for other publishers.)

Many publishers have reputations for obscure financial practices that confuse authors and effectively reduce royalty rates, increases publishers' profits. Some common practices help set the context for Random House's concerns:

• Publishers create a lower royalty rate for "deep discount" sales. In other words, if they give more than, say, a 52 percent discount, the author gets a lower royalty for those sales -- perhaps half of the usual one.
• Increasingly, publishers offer royalties on the money they receive rather than a fixed and obvious amount, like a book's cover price. The royalty statements that authors receive are confusing and it becomes difficult to tell how many books sold at what discount to whom.
• Because the book industry has traditionally allowed retailers to return inventory even after having it for months, publishers calculate a "reserve for returns." That is money the publisher owes the author but keeps in its own bank account to cover the number of books it thinks retailers will send back. This often runs 20 to 25 percent. The publisher is supposed to hold the money for only a certain period, like six months. However, the publisher doesn't clearly show what amounts it withheld, what returns ate up, and how much the author finally received.

However, I think another reason is at work. Random's big concern is the agency model itself. For the most part, the transactions are clear and the exchange of money straightforward to follow. A publisher sells a given number of copies and gets a fixed percentage of list price for each. Forget reserves, confusing discount levels, and effectively dropping author royalties. There is no way to obfuscate the business details, and authors can demand what they should make, rather than have complexities and "mistakes" that leave authors poorer and a publisher richer.

Image: Flickr user stars alive, CC 2.0.