As many of you probably know, the AAR has released the following statement regarding the launch of the Kindle Lending Library:
“The agent and author community have not been consulted about this new sort of use of authors’ copyrighted material, and are unaware of how publishers plan on compensating authors for this sort of use of their books, which is unprecedented. But we think free lending of authors’ work as an incentive to purchase a device and/or participation in a program is not covered nor was anticipated in most contracts between authors and publishers—nor do most contracts have any stipulation for how an author would be compensated for such a use. Without a clear contractual understanding with their authors, it is unclear to us how publishers can participate in this program. We take very seriously our role to protect the interests of our clients, and at this stage it is difficult to see how this program is in the best interests of our clients.”
I want to examine one sentence of the above more closely: “Without a clear contractual understanding with their authors, it is unclear to us how publishers can participate in this program.”
What follows isn’t about Amazon. It’s about the reality of what a subscription model is in terms of authors’ contracts with their publishers. So while others are talking about whether authors and publishers should or shouldn’t be participating in this particular subscription business, I want to look closely at whether publishers can participate on the basis of existing contract language.
First of all, for any subscription model in which the publisher is receiving some kind of guaranteed fee for participation, we are clearly talking about a license, not a sale. (In my conversations with publishers, not one person disagreed with this assessment, so we’re not talking about how you calculate 25% of net, we’re talking about how publishers should distribute the share of the license fee attributable to authors.) This is an important consideration, because most publishers’ boilerplates give them the right to sublicense the electronic rights to third parties, generally at a 50% split with the author.
I’m going to return below to the issue of this subsidiary right provision and whether it really applies in these circumstances, but for now, let’s just presume that publishers do indeed have this right and that, as most boilerplates have it, they therefore must pay 50% to the authors.
Here’s the problem: there is absolutely no language in most contracts to determine how this money is apportioned. (There are a couple of notable exceptions to this last sentence, but I would argue that the methodologies for distribution of money in those contracts are in fact not sufficient.)
When you think about a “fee” being paid by a third party to grant access to a set of titles published by a specific publisher to the third party’s customers on the basis of a monthly or yearly fee, you realize that the standard ideas about sales no longer apply. There are two things that an author is being paid for: the inclusion of a title in the program and the accessing of that title by a specific customer. (I’m assuming that, as with Amazon, most such third parties would have to provide detailed access information to publishers, so that publishers would know how many times each book was downloaded, even if they were being paid on a flat fee as opposed to a per-download basis.)
So, in other words, authors need to be paid for both inclusion and for use. These are distinct issues. Let’s do a thought experiment. Let’s say Publisher X has 100 titles in Retailer Y’s subscription plan. For the sake of argument, let’s say Publisher X is receiving $100 per title per month from the retailer (N.B. this is a completely hypothetical case — I have no idea what a third party would or should pay, I’m just using easy round numbers.) So the publisher has $10,000 in income, $5,000 of which is attributable to the authors (again, assuming a 50% split).
But now, let’s assume that of these titles, Author Z’s book is the only one accessed by readers. Let’s assume it’s downloaded 5,000 times. How much of the money attributable to authors does Author Z think he deserves? The answer is all of it: nobody else’s books were read, so, from his point of view, he should receive all the value associated with authors. He wants all $5,000. (Also, he’s probably wondering why he’s getting less per download than a traditional ebook royalty would likely provide — though of course since I’m making up the dollars here, who knows really what it would be, though there’s no question the author would indeed be thinking this on the basis of $1 per download.)
Ah, except that Author A, she doesn’t see it the same way. From her point of view, her publisher received money on the basis of inclusion of her title in the program, so even though it was not accessed at all, she rightly thinks that she should receive some portion of the fee — because that’s all her publisher was paid for (inclusion), so why shouldn’t she receive 50% of the money associated with that inclusion? She wants the $50.
So, where this leads us is that in order to apportion the money owed to its authors, publishers are going to have to invent, out of whole cloth, some kind of formula for how money is divided up. As an example (and this is really just an example), a publisher might decide that, say, 40% of the money owed to authors is going to be divided on the basis of inclusion (in other words, on a per title basis) and 60% will be divided on the basis of access (in other words, on a per download basis).
In this hypothetical, Author A (and every other author except Author Z) would get $20 (since 40% of the $5,000 is paid on the basis of inclusion, that’s $2,000, and Author A has one title of 100, so she gets 1% of that total) and Author Z would get $3,000 (since 60% of the $5,000 is paid on the basis of access, that’s $3,000, and Author Z get all of that since only his book was downloaded). The bad news is that BOTH Author A and Author Z think they got stiffed (Author Z wonders why he got only 30% of the total sum when his was only book downloaded — he thinks his book is subsidizing both the publisher’s and other authors’ profits — and Author A is frustrated that she got far less for inclusion of her book than her publisher did, since the publisher kept $50 simply for making the book available, and she got only $20).
This is an absurd example — as thought experiments are meant to be — but they underline a truth: this methodology has no contractual basis in the agreement made between author and publisher. Publishers simply do not have the right to make Solomonic decisions about how to pay authors. That’s what contracts are for, and there’s simply nothing in any of the contracts my authors have signed with their publishers that permits publishers to make these decisions without an amendment and the author’s agreement. And since different authors and agents may have different ideas about how to split the pot — and since by definition, each publisher can only have one methodology — it’s almost impossible to imagine, absent the creation of an ASCAP-like business to administer these things, that publishers can get all their authors to agree to the same definitions.
But, frankly, that’s not the only problem. There’s a far bigger one from my point of view, which is that 50% isn’t close to the right split in these cases. Publishers receiving a flat fee are receiving much more in relative terms than authors are in these cases — and since that flat fee involves no risk for the publisher apart from “lost sales” (and I suspect no publisher would participate unless it had decided that this risk was minimal and therefore a no-brainer, i.e. the fee was worth more than any measurable estimate of likely sales), there is great incentive for the publisher to make a deal like this if they felt the fee was large enough. Whereas for the individual author, at 50% of net attributable to the entire pool of authors, the actual dollar value of the fee is pretty inadequate, precisely because the aggregate value of offering a group of titles for a guaranteed fee is worth much more to a publisher than the granular value of the single title to the author. So, to make this work, publishers would probably have to pay at least 75% if not significantly more of the fee to their authors (at which point, they’re probably wondering why they’re getting into this enormous headache in the first place, to which I say: exactly!).
One last point, since I know this is turning into a doctoral dissertation. Honest examination of the definition of a license under most traditional contracts would pretty quickly demonstrate the inadequacy of the license language when what’s being licensed is not a specific book by a specific author, but a library of titles. For example, old-fashioned book club licenses pay 50% to the author, but that’s based on the specific inclusion of the book in the club, not the inclusion of multiple books by multiple authors. The economics are just so different! The publisher agrees to be treated like an author (i.e. to receive an advance against royalties) on a case-by-case basis, because it believes that the license creates enough increased value for the specific title that it is willing to risk the lost trade sales (and because it likely believes that these sales are incremental to trade sales, whether that is accurate or not). Here, the value to the publisher requires the inclusion of multiple titles, which by definition means that, because of the aggregate value, the publisher gets disproportionate value from the license in comparison to the individual author. In other words, it’s NOT a traditional license, and shouldn’t be treated that way.
All in all, what I’m really getting at here is something simple: publishers, unless they’ve very, very specifically addressed these issues in their contracts, do not have the right to include books in subscription models for which they are paid flat fees. They have no basis for distribution of the income to authors, and they have no real basis for determining how much authors should be getting in aggregate in the first place, given the inadequacy of the traditional license concept to the model being used.
All of which is meant as a recommendation to agents to make extremely clear to the publishers you do business with that they not decide for themselves how to step into this brave new world of subscription models without solving all this before they receive their first dollar. My guess is that most publishers, when faced with the complexity of the problem and the unlikelihood of finding a solution that makes everyone happy, will decide it’s just not worth the trouble. And that, perhaps, would be the best outcome of all.