When Not “Earning Out” is a Good Thing
Here’s how big shot literary agents make a compelling living.
A client brings an idea to the agent who advises the client about its commercial possibilities. It’s important to note that this advisement traditionally means whether or not the agent thinks he will be able to sell the project to a major publisher for a compelling advance against royalties. Not whether there are actual people out there willing to pay money to read such a book idea.
The way the best sale works (meaning to the best advantage of the writer and agent) with a major publisher is to make sure that the publisher’s advance guarantee exceeds the amount of royalty that the writer will actually earn.
For the life of the book.
So for example, a new love story from Ms. Bestselling Writer will sell to a big publisher for say a $5,000,000 guarantee against an industry standard royalty that escalates to 15% of the retail cover price for a hardcover purchase and 7.5% of the retail cover price for a paperback sale and 25% of net revenue for eBook.
Let’s say Ms. Bestselling Writer’s books sell on average 700,000 copies in hardcover, 650,000 copies in paperback and 650,000 copies in eBook…for the life of the book. Let’s say also that the average retail price of is $25.00 per copy per hardcover and $10.00 per copy for paperback and eBook. So, for those 2,000,000 copies sold, she’ll have earned:
15% of $25.00 is $3.75 earned for every one of the 700,000 hardcover books sold or $2,625,000, plus,
7.5% of $10.00 is $.75 earned for every one of the 650,000 paperback books sold or $487,000, plus,
25% of the publishers net from retailers (70% of $10.00 or $7.00 per unit sold going to publisher) for 650,000 copies sold would be 25% of $7.00 times 650,000 ($1,137,500).
Or $4,250,000 ($2,625,000 + $487,500 + $1,137,500)
So Ms. Bestselling Writer has earned $4,250,000 but has been guaranteed $5,000,000. So her book does not “earn out.” She’ll never get a royalty statement with a check in it.
So the publisher lost money on that one, right? Not by a long shot.
The publisher has made a major return on investment even though it has paid $750,000 more than the book earned. How did that happen?
The publisher gets 50% of the retail cover price for every copy sold, or $8,750,000 for 700,000 copies sold of the hardcover and another $3,250,000 for the 650,000 copies sold of the paperback. (The other 50% goes to retailers).
For eBook the publisher gets 70% of the retail price of $10.00 for the 650,000 copies sold or $4,550,000.
Let’s not forget about returns though.
To print and ship the necessary number of hardcover copies to sell 700,000 would require about 900,000. For paperback, to sell 650,000 copies would take about 800,000. So the publisher would have to pay for the printing, shipping and processing of returns for about 1,700,000 copies. This would cost about $2,800,000.
But for the eBook, the cost would be negligible. Hence the land grab to control eBook between Amazon and the Big Five.
So the bottom line for the publisher is gross revenue of $16,550,000 minus the $5,000,000 guarantee to Ms. Bestselling Writer, minus the $2,800,000 to print and ship the physical books. Or a total of $8,750,000 ($16,550,000 – $5,000,000 – $2,800,000) to their bottom line.
Even though the book never “earned out.”
But let’s say the agent was only able to negotiate a $1,000,000 deal for the writer who sells 2,000,000 copies, not $5,000,000. Then the publisher gets to keep the $750,000 that it didn’t “overpay” and the writer earns $4,250,000 paid out over time…in six-month installments attached to her royalty statements.
How far would a publisher be willing to dip into their pool of revenue to overpay for a book? This is the question literary agents enjoy contemplating. For the above scenario…if the publisher had a crystal ball and knew that the book would sell 2,000,000 in that combination of formats? I’d suspect they’d go as high as…$10,000,000.
Naturally a literary agent wants to have a lot of clients like Ms. Bestselling Writer. Clients who cannot command a competitive bidding situation (more than one publisher vying to purchase the rights to the book), they’d prefer to pass. If only one publisher wants your client’s book, you have very little leverage to negotiate.
The big books from big name writers (who don’t bleed red ink, but don’t earn out either) are the coveted ones for agents. Although it may be apocryphal, agent Andrew Wylie has been credited with having once said, “If my client’s book earns out, I haven’t done my job.”
But here’s the thing…
When I began in publishing in the 1990s, there were at least 20 “major” houses to submit a book proposal or novel. Today there are only 5 major corporations that control the trade book market. Sure, you’ll hear that there are tens of different publishing imprints within the major corps that “compete” with each other for properties. But when the time comes to put money on the table in a book auction, only one of those imprints from each of the five will end up bidding. The most big bids you’ll ever get as an agent today are 5.
And you can never discount the power of negative commentary around a book on submission. Book publishing is so connected that if an editor at Random House didn’t care for a submission, you can count that an editor at HarperCollins who also received the submission will get that information before his having to make his own decision. No one likes being the only one to like something.
Just as book fever can escalate if multiple editors pursue a particular project, so can “negative” feedback kill a book before it’s ever had a chance. Talk to any agent and they’ll talk your ear off about a submission of theirs that got killed by a single snarky comment.
What all of this comes down to is the fact that becoming one of those coveted major bestselling writers who can garner $1,000,000 plus advances is as likely for a fresh faced young actor to become Brad Pitt.
As for literary agents, the notion that they’re going to build a stable of these unicorns is just as likely.
If only there were a way for writers to do their work, find people who like it, and then offer the book to them directly through free distribution networks as well as their own… Instead of having to curry favor with a big shot literary agent, then hope the literary agent is able to drum up enough interest from the Big Five to make a good deal, and then wait 12 to 15 months for their work to reach the public and then another month to learn whether the book “worked” or not and then hope that their next book will be embraced by their publisher, all the while never knowing who actually bought their book or why…
Big corporate book publishing will always have a place for Ms. Bestselling Writer. But if you aren’t her, wouldn’t all of the time you spend hoping to magically become her be better spent learning how to become Ms. Master of Permission Marketing?
And guess what? Once you do master permission marketing and build your own platform to speak directly to your book buyers, guess who’ll come knocking on her door?
Big Literary Agent and Big Publishing, that’s who. But by then, you may find that what they’re offering isn’t such a great deal.
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