The Story Behind The “Random House Gives $5,000 Bonuses” Story
[Happy New Year! Here’s an oldie but goodie about how profitable a BIG BOOK SERIES can be and why resisting the impulse to sell yours to a big publisher after it’s a success makes sense…]
For those of us who came of age in the analog universe, the phrase “follow the money” reminds us of a movie that inspired thousands of people to get graduate degrees in Journalism. It comes from William Goldman’s brilliant screenplay adaptation of Bob Woodward and Carl Bernstein’s seminal narrative nonfiction book All the President’s Men, which was published by the venerable Simon & Schuster in 1974.
In Alan J. Pakula’s movie, Woodward’s primary source Deep Throat (revealed a few years ago as the FBI’s number two man at the time W. Mark Felt), only agrees to confirm or deny Woodward and Bernstein’s reporting. He won’t hand them the Watergate story on a silver plate. But W&B get stuck. Seeing Woodward’s (played by Robert Redford) desperation, Deep Throat (played by Hal Holbrook) agrees to give Woodward one piece of advice.
He tells Woodward to “forget the myths the media has created . . . follow the money.”
The quote is not in the book. Consummate storyteller William Goldman coined that “follow the money” phrase, not Woodward and Bernstein. As a seasoned Hollywood screenwriter, Goldman knew that putting aside mythology and following the money in his business is always revelatory. By extension, he used money as the through line device for his screenplay about Washington. Can anyone argue today that money is not the operating factor in politics? Back then it wasn’t so obvious.
I’m sure you’ve read the press coverage about Random House Inc. giving each of its 5,343 employees a $5,000 bonus this year. I checked this morning on Google News and over 1,100 stories have been written about their $27,000,000’s worth of good cheer.
How did they afford to do that?
I worked at divisions of Random House (Dell Publishing and Doubleday) and I can tell you that bonuses in my day were often of the “No Christmas party this year but Congratulations . . . you get to keep your job next year!” variety.
Random House was able to pass on some cash to its employees because of the jaw dropping success of the Fifty Shades of Grey trilogy. You already know this story. An online Australian outfit called The Writers Coffee Shop (a long tail eBook and Print on Demand publisher like Black Irish Books) published all three of E.L. James’ erotic novels in 2011. The eBook versions of the books were $9.99 U.S., but the trade paperback editions were a whopping $29.99.
Just so you know, TWCS wasn’t gouging on the paperback price. Print on Demand publishing is just that . . . one copy at a time, which is not exactly efficient for a big sensational hit. And as the Grey books are all over 500 pages in length, the price per unit POD costs must have been quite high (my estimate would be about $8.00).
As a $29.99 price point yields $15.00 (50%) to the publisher after the retailers take their share, the production costs exceeded the per unit revenue ($8 versus $7). Not so good. While a $7 per unit revenue is nothing to sniff at, maintaining any kind of large inventory for a retailer is a nightmare for a POD book. So the big margin per unit doesn’t pay off all that much for the publisher.
The truth is that there was a lot of demand for the paperback even at that high price point, but the copies just weren’t out there for people to buy. It was a very large lost opportunity.
But the good news was that the word of mouth on the books was sensational and by the spring of 2012, the three books had sold over 250,000 eBooks. The paperback versions however were just dribbing and drabbing along . . . about 7,000 sold per title. It was obvious that something had to be done.
So when 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?
Let’s begin by looking at the traditional paperback numbers.
The books sell for $15.95 a unit in paperback. The publisher, Random House/Vintage, sells the books wholesale for 50% off the retail cover price to retailers who in turn sell to consumers. So each book sold brings in approx. $8.00 a unit to Random House/Vintage.
So the total amount of revenue generated by 17,500,000 paperback sold is $140,000,000 (17,500,000 x $8.00).
Now Random House/Vintage had to manufacture, warehouse and ship at least 17,500,000 paperbacks to generate that 140 million of revenue. Let’s say they’ve produced 20,000,000 to account for returns etc. And let’s say it cost Random House/Vintage $2.00 per unit to produce, warehouse and ship them. Their economies of scale probably brought that unit cost way down…under $1.50 I’d assume, but let’s keep $2.00 as our number, again just to be conservative.
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.
Now traditional trade paperback royalties are 7.5% of the retail cover price for every copy sold, which would equate to $1.20 per unit copy sold (7.5% of $15.95) taken out of the big pot.
Some big cheeses (big bestselling writers with long track records of success) get royalty escalations after 100,000 units sold…up to 10% of the retail cover price. Again, let’s be crazily conservative and say that E.L. James’ and her agent convinced Random House /Vintage to pay a royalty of 10% of the retail cover price straight instead of 7.5%.
10% of $15.95 is, to make the math easier, $1.60.
$1.60 per unit with 17,500,000 sold throws off $28,000,000 in royalties for paperback sales to E.L. James.
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.
But for eBook sales, things are even better for Random House/Vintage.
After you spend at most $1,000 converting a book into the appropriate file formats (kindle and ePub), there are no production costs to produce and sell an eBook. You don’ have to print anything. You don’t have to warehouse anything and you don’t have to ship anything.
So Random House/Vintage’s gross $122,500,000 revenue from the sale of 17,500,000 eBooks is only reduced by the amount of money it cost to convert the files to the appropriate format. Let’s be crazy and say it cost them a half a million dollars to do that for three books that were already in the correct format. That $500,000 will cover the amount of money they needed to spend to employ for a full year the total number of employees who directly contributed to the digitalization, marketing and publicizing of the book.
Remember the publisher has no production costs…no matter what they tell you. Their overhead (what it takes for them to employ people and keep the lights on) is not a production cost!
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.
Production & Distribution? Absolutely. This is where Random House did a ton of work. They earned every penny of the $72,000,000 they made from the sale of the paperback editions.
EBook Distribution? No. All online retailers had the eBooks available before RH took over. RH/Vintage did not add any value to the eBooks. They merely embedded the Vintage colophon into the digital editions.
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. And she would have controlled the price point too.
Can’t everyone win?
Can’t a big traditional publisher get a substantial windfall even when a bestselling self-published author takes home the lion’s share of revenue?
Simon & Schuster thinks so.
I guarantee you that after losing out on the Grey sweepstakes last spring, Simon & Schuster followed the Fifty Shades of Grey math. And they figured out, like we just did, that 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.
If you are still fitzing and futzing around telling yourself that you’ll start that anonymous blog about the inner working of the United Nations, that artisanal salad dressing business, that high end wood box manufacturing company or putting off outlining your own post apocalyptic trilogy, I recommend you take a good hard look at Hugh Howey’s business.
Wool is not his first novel. By my count, he wrote and self published seven novels before Wool. Wool was as short story that came to him years after he began his long tail business. He didn’t quit writing when no one cared about his first seven novels (probably more). More impressive, though is that he didn’t sell himself short when they did care either. Being recognized by the big houses was nice, but he wasn’t going to let go of his work just for the third party validation of having a dog on the spine of his books.
He’s a Pro.
I think it’s likely that if he suddenly loses the mojo and Wool tapers off, he’ll still be writing. He can’t help himself. It’s who he 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.