The smart money is on the jackal

Revolutions produce unlikely heroes, and the Digital Revolution has produced a very unlikely one in the form of a man that many believe is so wanting in ethical principles that he is nicknamed The Jackal. Yet it is on literary agent Andrew Wylie’s fangs and claws that the populist dream of a fair e-book royalty rests as he dares the world’s highest profile trade book publisher to do something about the slap he has administered to its face.

The smart money is on The Jackal, and to understand why you have to think like a jackal.  While pundits debate contract law and publishing ethics, the real war is being conducted on a less visible battlefield. But it is one on which Wylie holds the high ground.

To understand Random House’s reluctance to protect its rights from Wylie and other marauders you need to understand a number of not so obvious factors.  The most salient of them is this: Publishers are loath to sue authors (or the widows and children of authors).

Let’s see how these factors play out in the power struggle unfolding before our eyes.

Random House not confident of its legal position

In 2001 Random House sued Rosetta, an e-book startup that acquired directly from authors the digital rights to books by such Random House lions as Kurt Vonnegut Jr., Robert B. Parker and William Styron, books that were still in print in paper format under Random House imprints. Random had published them before there was such a thing as e-books, but nevertheless considered a book is a book is a book whether in tangible or digital form. The courts however rejected Random’s position, denying their request for an injunction against Rosetta. Random filed an appeal and the court turned it down. A second appeal was rejected too, forcing Random to work out a settlement with Rosetta. The critical issue – what is a book? – remained unlitigated and left Random uncertain about its legal position.

Random Backs off from Open Road Threat

When publishing superstar Jane Friedman launched her Open Road e-book venture she declared her intention to start with several works by Styron including Sophie’s Choice and the Pulitzer Prize-winning Confessions of Nat Turner. The problem was, Random House claimed it owned those rights (presumably having recovered them from Rosetta as part of the settlement) and it issued a stern warning to all “third parties” without naming Friedman specifically. Authors, stated CEO Marcus Dohle, are “precluded from granting publishing rights to third parties that would compromise the rights for which Random House has bargained.” By drawing a line in the sand, Random expected Friedman and other potential interlopers to back off or face the full wrath of the publisher’s litigators. (see Random House Serves Notice on Would-Be E-Interlopers)

It is  a fundamental business principle that you don’t make threats you aren’t prepared to act on. And that is why we were flabbergasted four months later to learn that Random House had released e-rights to the Styron estate (See Random Returns Sabre to Scabbard in Styron E-Book Standoff). What was that about?

“The decision of the Styron estate is an exception,” Random executive Stuart Applebaum explained. “Our understanding is that this is a unique family situation.”

Why, after rattling its saber so truculently, did Random give in? In our estimation it’s because ultimately, to make good on their threat, they would have had to sue Styron’s widow and children. And that would be a public relations disaster.

Whether Styron was truly an exception or Random blinked, one thing was clear to publishing professionals: sooner or later there would be further tests of the publisher’s determination. How would Random react the next time?

We’re about to find out.

Don’t Bother Suing Agents

Claiming that he hates the low e-book royalties paid by traditional publishers (see Random House Changes E-Book Royalty Policy), agent Wylie, representing hundreds of distinguished authors such as Salman Rushdie, Martin Amis and the late John Updike, announced that he is starting his own e-book publishing venture and intends to launch it with books published by Random House and other trade book publishers.

Does he have the right to do that? Wylie says he does: “The fact remains that backlist digital rights were not conveyed to publishers, and so there’s an opportunity to do something with those rights,” he declares.

Despite what happened with Open Road, some industry observers expected Random House to threaten to sue Wylie’s ass into pebble-sized pieces. But Wylie knows they won’t, because, generally speaking, agents are not legally liable for breaches of contract committed by their clients. A lawsuit against Wylie would in all likelihood be thrown out of court, and the judge would tell Random that if they have a beef it’s with Wylie’s authors, they’ll have to sue Wylie’s authors. Which brings us back to our thesis: Publishers are loath to sue authors (or the widows and children of authors).

So? How does Random intend to punish Wylie? “Regrettably,” Applebaum declared, “Random House on a worldwide basis will not be entering into any new English-language business agreements with the Wylie Agency until this situation is resolved.”

This is known as the We’ll Cut Off Our Nose to Spite Your Face ploy, and it will avail Random nothing. Wylie’s clients are so coveted by Random’s rivals that if Random made good on its threat you’d see the greatest migration since the Aleuts crossed the Bering Land Bridge.  Jackals are standing by!

Buyer? Seller?

Though legal threats won’t faze Andrew Wylie, handling the challenge of being both an agent and an e-book publisher might. A number of knowledgeable people like Macmillan’s John Sargent have not only deplored Wylie’s decision to put all his authors’ eggs in Amazon’s basket but have questioned whether it’s in the best interests of his authors. There is arguably more money to be made selling not just to Amazon but to Sony, Barnes & Noble, Apple, Kobo, and other retailers.

Navigating the shoals of conflict of interest between buyer and seller is another daunting task. Even if he is able to build a “Chinese wall” insulating the two functions from short-circuiting each other, Wylie’s own clients will reasonably want to know how it’s going to work: “If my agent is now my publisher, who am I supposed hire to negotiate with him?”

Will Wylie’s stratagem succeed in forcing publishers to raise their royalty rate?  Not a chance.  E-book royalties will eventually go up, but it will be no thanks to Crusader Wylie. But we thank him for articulating the dissatisfaction of authors and agents with low royalty rates and for so fearlessly acting on his convictions.

Richard Curtis

After warning e-poachers to keep their mitts off its books (see Random House Serves Notice on Would-be E-Interlopers) Random House agreed to let the William Styron estate place e-book rights to some of the late author’s books with recently formed independent e-book company Open Road Integrated Media.

It was speculated that Random’s threat last winter, advising authors they were “precluded from granting publishing rights to third parties that would compromise the rights for which Random House has bargained,” had been provoked by Open Road’s announcement that it had reached agreement with the Styron estate. So it is puzzling that Random yielded to the very same company without a fight. Motoko Rich, writing the story up in the New York Times, seems to suggest that the accommodation was achieved by friendly persuasion stemming from warm feelings between the company and the estate.

Random’s Stuart Applebaum, however, asserted that “The decision of the Styron estate is an exception to these discussions. Our understanding is that this is a unique family situation.” Whether the publisher will be moved by similar auld lang syne appeals from other authors is an intriguing question. But Random has not made it easier on itself by making an exception to its own stern rule.

Read Rich’s story in detail: Random House Cedes Some Digital Rights to Styron Heirs

Richard Curtis
Every Blogger owes a debt of gratitude to newspapers and magazines. This posting relies on original research and reporting performed by the New York Times.

TrueSlant.com blogger Roger Theriault has picked up a story from the MobileRead forums that Random House will go against the recent rush by its Big Six buddies to the “agency” e-book retail model recently introduced by Apple.

Apple’s approach is for publishers to retain control over the list price, rather than allowing the list price to be pegged by the e-tailer, as is currently employed by Amazon. It also allows publishers flexibility in timing release of e-books – delaying them rather than releasing them simultaneously with publication of hardcover editions.

The move to the Apple model by three major houses spearheaded by Macmillan was the cause of a controversy that triggered removal of Macmillan’s buy buttons by Amazon for a week, at the end of which the e-book retailing landscape was altered, possibly forever. (For background see Apple Promoting a New (and Radical!) Model for Selling E-Books? and Publishing’s Weekend War: 48 Hours that Changed an Industry.)

Random’s decision is based on two approaches to e-book publishing that are at odds with the philosophy of at least three of its fellow publishers. A RH spokesperson voiced the opinion that publishers “have no real experience at setting retail prices.” That explains why Random held back from embracing Apple’s iPad tablet. The other reason is timing of e-book releases. “Our current policy is we release e-books at the same time as physical books,” she said. “I haven’t been convinced that it’s good for the author or consumer to delay the release.”

You can read details here: Random House sides with Amazon, e-book readers on pricing

Richard Curtis

Publishers are fighting the last war, but they’d better turn their heads forward if they don’t want to lose the next one.

The notice served by Random House to authors and agents, vowing to protect its backlist from predatory e-book developers, focused so much attention on previously published books that just about everybody took their eyes off an infinitely larger issue and an infinitely larger prize: the future.

When we look back at the fireworks triggered by Random House’s action we will see it as a noisy squabble over a relatively small number of contracts with ambiguous definitions of the word “book”. Very old books have entered the public domain beyond the reach of proprietary publishers. Very new ones, on the other hand, dating from around 1990, carry explicit language defining e-rights that no buccaneer would dream of challenging. That leaves a body of post-World War II titles predating the e-book revolution, and in a great many cases their contracts have just enough references to things like “information storage and retrieval rights” and “no competing editions” to intimidate most would be poachers. There may not be that many books worth fighting over, and certainly not that many worth suing over.

But there is one body of books that publishers will have to fight for if they are to avoid calamity: the ones that have not yet been published. Events of the last few weeks have introduced a concept so terrifying to book publishers that they have refused to think about it: the separation of e-books from the suite of rights that they have taken as God-given for centuries. Who can blame them for living in denial? Deprive publishers of e-rights and they become mere printers, game set match.

We don’t have to look at ancient history to see how another right that publishers took for granted was pried out of their clutches, and that’s audio. For decades “audio” was a sleepy little curiosity that no one felt worth fighting over. For many of us, it meant a boxed set of Caedmon records of Dylan Thomas reading his play Under Milkwood in 1953. But as recording media evolved from vinyl to tape to CD to streaming, the audio business became a billion dollar one, and authors and agents began demanding separation of those rights from the fundamental package just as they had done early in the 20th century with movie and television rights.

The turmoil of the last few weeks, capped by the dramatic announcement by business book author Stephen Covey of his intention to sell his e-book rights to Amazon, should make it crystal-clear that severance of those rights from a publisher’s franchise is now a viable option for authors. At the moment it is an option for big-name stars only, but don’t so many revolutions begin on the backs of the mighty? As we recently wrote, agents have been sitting on the sidelines waiting to hear the words “e-book” and “advance” used in the same sentence. Now they smell money. A recent all-expenses-paid junket by agents to Amazon’s headquarters may have had some influence on these developments (See Why Don’t Agents Want to Play? Amazon Flies a Bunch to Seattle to Find Out).

The implications of separation of e-rights are profound and for publishers they must be excrutiatingly threatening, for their biggest nightmare is that Amazon will become a publisher. Now that Amazon is a bidder for electronic rights, that day has arrived.

It must be said that publishers have brought some of this on themselves by pegging the e-book royalty rate at 25% of net proceeds or even less. There are enough independent e-book outfits offering 50% (including – full disclosure – E-Reads) that it was only a matter of time before authors and agents did the math and came to the conclusion that 50% was twice as large as 25%.

The nightmare is out of the box. Is there any way for publishers to get it back in and contain the threat? The answer is yes, if they are willing to bite the 50% royalty bullet. Earlier this week in connection with Random House’s dictum, the Authors Guild urged that very condition. Random House, said the Guild, should “start offering a fair royalty for those rights.” Their statement went on to say:

Authors and publishers have traditionally split the proceeds from book sales. Most sublicenses, for example, provide for a 50/50 split of proceeds, and the standard trade book royalty of 15% of the hardcover retail price, back in the days that industry standard was established, represented about 50% of the net proceeds of the sale of the book. We’re confident that the current practice of paying 25% of net on e-books will not, in the long run, prevail. Savvy agents are well aware of this. The only reason e-book royalty rates are so low right now is that so little attention has been paid to them: sales were simply too low to scrap over. That’s beginning to change.

While it’s well and good for publishers to pore over their old contracts, they really need to examine the boilerplate in their current ones, and where it says “25%” they should consider amending it to 50%. Otherwise they may see their digital book rights calve off irretrievably like glaciers falling into the sea.

Richard Curtis

Like a wolf marking its territory against rivals, Random House served unequivocal notice today on what it perceives as potential e-poachers seeking a loophole in Random’s definition of “book”. The warning was embedded in a letter from Random CEO Markus Dohle mailed or emailed to literary agents describing the company’s plans and initiatives in the digital world. Authors were also put on notice that they are “precluded from granting publishing rights to third parties that would compromise the rights for which Random House has bargained.”

“The vast majority of our backlist contracts,” writes Dohle, “grant us the exclusive right to publish books in electronic formats. At the same time, we are aware there have been some misunderstandings concerning ebook rights in older backlist titles. Our older older agreements often give the exclusive rights to publish ‘in book form’ or ‘in any and all editions’. Many of those contracts also include enhanced language that references other forms of copying or displaying the text that might be developed in the future or other more relevant language that more specifically reflects the already expansive scope of rights. Such grants are usually not limited to any specific format, and indeed the “form” of a book has evolved over the years to include variations of hardcover, paperback and other written word formats, all of which have understood to be included in the grant of book publishing rights. Indeed, ebook retailers market, sell and merchandise ebooks as an alternate book format, alongside the hardcover, trade paperback and mass market versions of a given title. Whether physical or digital, the product is used and experienced in the same manner, serves the same function, and satisfies the same fundamental urge to discovery stories, ideas and information through the process of reading. Accordingly, Random House considers contracts that grant the exclusive right to publish ‘in book form’ or ‘in any and all editions’ to include the exclusive right to publish in electronic book publishing formats. Our agreements also contain broad non-competition provisions, so that the author is precluded from granting publishing rights to third parties that would compromise the rights for which Random House has bargained.”

If Random’s position sounded familiar to some, it’s the same one that the company used in 2001 when it sued Rosetta, an e-book startup that offered digital editions of books by Kurt Vonnegut Jr., William Styron and Robert B. Parker, having secured them directly from the authors. Random had published the books before there was such a thing as the Internet, but nevertheless considered a book to be a book no matter what form it took. Random’s request for an injunction was denied by the court, and Random then filed an appeal. It too was denied.

Random and Rosetta eventually settled, allowing Rosetta to continue publishing the books but leaving unresolved the issue of who controls e-rights to books where the language defining them is ambiguous.

By issuing its letter to agents today, Random House reasserted its position that, ambiguous or not, the publisher considers the language in its contracts to grant it ironclad control over e-rights. Anyone who believes otherwise is advised to take a good sniff before venturing over the perimeter of Random’s territory.

Richard Curtis

You shall not curse the deaf nor place a stumbling block before the blind.
Leviticus 19:14

I realize it’s unfashionable to feel sorry for Random House, but I think they’re getting the rotten end of the stick for a problem not of their making.

You’ll recall that Amazon’s initiative to convert the texts of Kindle e-books to speech generated a furious response from authors and publishers because of potential infringement on their reserved commercial audio rights. Under threat of legal action, Amazon backed off, leaving the decision to speech-activate Kindle texts up to content owners. Many publishers opted out. Random House was one of them.

Now, The Reading Rights Coalition, representing more than 15 million visually challenged Americans, has censured Random House for denying audio service to its constituents. “When Random House turned off the text-to-speech function on all of its e-books for the Kindle 2,” declared Dr. Marc Maurer, President of the National Federation of the Blind, “it turned off access to this service for more than 15 million print-disabled Americans. The blind and other print-disabled readers have the right to purchase e-books using this service with text-to-speech enabled. Blocking text-to-speech prohibits access for print-disabled readers and is both reprehensible and discriminatory.” Maurer was joined by executives of Lighthouse International, American Association of People with Disabilities, National Spinal Cord Injury Association, American Council of the Blind and other organizations in denunciations of Random. A petition is being circulated.

It would be unspeakably callous to disregard the needs of the blind and reading-disabled. And that’s the point: book publishers have always been in the vanguard of industries sensitive to the needs of the visually challenged. Language guaranteeing to them free access to published books is a standard feature of every book contract I have ever seen. A recent Random House contract says, “Random House shall have the right to grant transcription or publication rights in any Work in Braille or other non-book formats specifically for the visually impaired without charge.” The subsidiary rights grant in a HarperCollins contract on my desk grants Harper “Braille, large-type and other editions for the handicapped (the Publisher may grant such rights to recognized non-profit organizations for the handicapped without charge and without payment to the Author).” I’m ready to bet that every one of the thousands of contracts in our agency’s files has similar language.

I don’t think the leadership of the Reading Rights Coalition is doing its members a favor by attacking publishers, who have been victimized by Amazon/Kindle’s audio initiative just as severely as the visually impaired. There is a line between a function intended for the disabled and one designed for fully sighted and literate. Amazon’s aggressive step across that line put publishers on the horns of a cruel dilemma: by withholding audio rights from Kindle they deny service to a genuinely needy population; but by enabling Kindle’s audio feature they deprive legitimate copyright holders of the opportunity to exploit a commercial right. They also incur liability: a publisher can be sued by authors whose commercial audio rights had been given away to Amazon. And because that threat of liability is ever-present to Random House and its brother and sister publishers, it’s not likely that petitions or humanitarian appeals (including to President Obama) will gain any traction.

What’s the answer? We must come up with a voice-enabling technology expressly targeted to the handicapped, and segregate it from commercial audio. That’s not a job for publishers. It’s a job for technologists, and we wish them godspeed in solving the problem.

Amazon should be in the forefront of those supporting such an initiative, because there are 15 million visually impaired individuals ready to buy a device that serves them what they need and are entitled to. If Amazon doesn’t or can’t do the job – well, there are a lot of e-book devices coming on stream, and the one that solves this audio dilemma will have a huge advantage and a ready-made market.

For the Coalition’s full statement click here.

Pictured: The HumanWare VictorReader Stream digital-audio player for the blind.

Richard Curtis

Markus Dohle, who in May succeeded Peter Olson as Chairman of Random House’s worldwide operations, stunned the publishing industry with the announcement that two collossi who bestrode the company’s editorial hierarchy, Irwin Applebaum and Steve Rubin of the Bantam Dell Publishing Group and Doubleday divisions respectively, were departing. Moving up in a major reorganization are Gina Centrello of Random House, Sonny Mehta of Knopf, and Jenny Frost of Crown.

Dohle’s letter to agents is quoted in its entirety below. You’ll also find links to the press releases at the bottom of this blog.

Stay tuned for further commentary. This one’s huge!

Dear colleagues and agents,

I would like to share with you the attached announcements I made today
regarding a reorganization within Random House and the departure of two
colleagues, Irwyn Applebaum and Steve Rubin, with whom you’ve worked over the
years.

I want to emphasize that within this new structure our publishing groups
retain their autonomy and our publishing programs and efforts will continue
unabated. We are committed to the values of a vibrant marketplace and to
supporting the passions of our individual editors and publishers to pursue
the projects they desire. For that reason we will continue the Random House
policy of permitting imprints to bid against each other in auctions up to the
moment that there are no out-of-house participants.

My intention is that Random House should always lead the market, even in
difficult times, and we can do that only by forging stronger relationships
with our authors, you, their agents, our retail customers and readers
everywhere. These changes will make each individual imprint stronger and
make us better able to accomplish that goal collectively.

Please don’t hesitate to share your thoughts.

Regards,
Markus

Additional Press REleases (PDF format): M Dohle_12_03_08.pdf, M Dohle_Rubin.pdf, M Dohle_Applebaum.pdf

Random House’s CEO Markus Dohle wants to expand the company’s e-book list by a serious multiple, taking the inventory from 8000 to something approaching 15,000. Matt Shatz, Random’s VP for digital operations, says sales of e-books have been soaring.

They certainly have been, as we have reported here. But E-book sales have a long way to go before matching the size or profitability of good old fashioned printed books. For that reason, and because any bold investment in today’s economic climate is worth cheering for, Random’s commitment to a dramatic increase in e-content is a very good sign.

RC

As cash-hungry bookstores return slow-moving inventory to publishers to free up bucks to buy new books, and as the industry anxiously monitors the health of the Borders bookstore chain, there are signs that publishing is hunkering down like every other business enterprise these days.

Publishers Lunch Deluxe cites an Associated Press report that Random House is pulling in its horns on employee benefits. First, it’s freezing pensions at current levels; and second, new hires will not be offered pension participation. The company will continue to match employee contributions to 401k plans, however. Deluxe, publishing’s online trade newsletter, also mentions a Quill and Quire news item that Random’s Canadian division will not be exhibiting at the Canadian Book Expo.

Random House is a bellweather; whatever it does, the rest of the trade book business often follows.

However…

Before everyone starts running on fear itself, we should remind ourselves that books are still the most cost-effective, personal and meaningful holiday gift of all, and the pleasure of reading one can stretch over months.

I’ve never agreed with anything President Bush has said, but, my fellow Amuricans, maybe this is a good time for Americans to go shopping — for books. In fact, a wonderful initiative has been offered by a major publisher to promote books as gifts. It’s called Books=Gifts. Check it out. And when you do, notice who’s sponsoring it: Random House!

Richard Curtis

In a letter circulated among literary agents, signed by David J. Sanford, Director Publishing Contracts, and Katherine J. Trager, Senior Vice President, Secretary and General Counsel, Random House announced a shift in e-book royalties from one based on the list price to one based on the actual net moneys received by the publisher. “With the widespread use by consumers of electronic devices such as the iPod, the Amazon Kindle, and the Sony Reader, a significant market for ebooks and digitally delivered audio content is finally ready to emerge,” the letter stated. “In response, Random House is making major investments in our digital infrastructure and is creating digital files of active titles so that they are available for sales as ebooks, as downloadable audio, and for Internet search and discovery.”

Commencing December 1, 2008, the new royalty rate for sales of ebooks will be 25% of the amount received for all sales, Random’s letter goes on to state. What does Random House actually receive? Most e-book retailers take a discount of approximately 50% of an e-book’s list price. Therefore, the amount received by Random House — the amount on which the new royalty will be based — is about half of the list.

How does that play out in real dollars?

A recent Random House contract states that on all copies of a work sold as an electronic book, the royalty will be 25% of the US suggested retail price until the book’s advance has earned out, and 15% of the list price thereafter. Under the current (pre-change) royalty structure, on a book retailing for, say, $10.00, the e-book royalty would be $2.50 per download at 25%, then $1.50 per download when the royalty rate shifts to 15%.

By contrast, the new royalty of 25% of the net receipts comes to something like $1.25 per sale on a $10.00 book (25% of 50%). So, Random House’s change is definitely a reduction of e-book income for authors.

Random’s justification for the change is “1) The new rates are very much in line with the e-book and digital audio rates being offered today by our major competitors… 2) The way the market is developing, the publisher’s list price will soon no longer be a relevant basis for calculating royalties in the digital environment… 3) The electronic formats are not as inexpensive to produce and publish as many believe [...] We have made substantial investments, and we will continue to invest, in related digital infrastructure, such as the creation and maintenance of a digital archive, and in the development of the market for electronic formats… 4) The new ebook rate continues to compare favorably to the rates we pay for other formats in which books are made available.”

By way of comparison, and as a matter of full disclosure, E-Reads pays a royalty of 50% of net receipts for e-book sales, and has done so since its founding in 2000. On a $10.00 book, that means a royalty of $2.50. At no point is the royalty rate ever reduced.

– Richard Curtis