A group of papers recently crossed my desk that reminded me of the permanent or eternal reserve that many publishers keep on individual books. I suspect that few authors are aware of this, but it’s a serious issue that affects almost every author.

The root of this problem is that many publishers keep a tiny but permanent reserve against returns. This should not be confused with illegitimate practices regarding the reserve for returns that less than reputable publishers have employed. This eternal reserve, as any of the publishers that utilize it will likely argue, is a legitimate accounting practice. And, if the permanent return is tiny and not fixed, it can be justified. If it is not, it is an egregious use of the reserve concept and a serious way of depriving authors of royalty income.

First, some background: I have been on both sides of this issue. Prior to becoming an agent I worked in the contracts and royalty areas for two of the largest publishers. In my first job I actually had access and spent some time with the large royalty books that housed the company’s royalty records. (Yes, the hand entered books that held the royalty records.) In these books you could follow the royalty records of titles that had been in print for 20 or even 30 years. I remember reviewing books that hadn’t had a return in five or even ten years. These were customarily “dead” books, long out of print. Sometimes a return came in, but rarely.

Even on these titles, a permanent reserve was usually kept. The reserve would often be 50 books, period. From the author’s point of view, you can make the case that no permanent reserve should be kept. When a book is essentially dead—let’s say three years without a recorded sale or return––even the final or permanent reserve should be liquidated. However, a publisher could legitimately argue that returns are received even ten years after a book is dead and so they shouldn’t be forced to pay royalties on books that could be returned.

From where I sit, this is a coin toss—both sides can make legitimate claims. As long as the publisher must absorb returns for credit, it wants protection from paying royalties on these unsold copies. If no returns are imminent by any common sense measure, authors should be paid royalty income that has in all likelihood been earned.

In my capacity as agent, I have several clients with long, productive careers. I have full access to their royalty records, which I periodically review. Even though there is obviously a smaller collection of authors, the patterns of sale are similar to the ones I saw as a publishing house employee. After the active life of a book, years could go by with no activity—no returns whatsoever. Sometimes a return or three would pop up. The fact is that nearly all books follow a similar pattern in their publishing lives. Ten year old books, with no new shipments, don’t suddenly return 500 or 1000 copies. In fact, I can’t remember even moderate amounts of returns for an older book (for many books this would be at least three years post first publication). If a book is very active, with new shipments, that is a different story. In that case, the book will behave essentially like a recent title and substantial bursts of returns are possible.

Despite these patterns, that anyone who tracks royalties knows, many publishers do use an eternal reserve. It is a controversial, debatable practice, but it is legitimate. But, what happens if the permanent or final reserve is abused? What if it is more than a token reserve or if it is completely disconnected from any common sense notion of how books are returned? In these instances, the publisher is simply failing or refusing to pay royalties.

One such practice that greatly concerns me is a permanent reserve that is set as a percentage of gross shipments. Even a 1% permanent reserve could deny substantial royalty income to an author. Let me give you an illustration. During the initial publication of a book 100,000 copies are shipped and the publisher establishes a standard 1% permanent reserve against this shipments, so that’s a 1000 copies. Depending on the book’s sales, the permanent reserve isn’t visible or operative, but subsumed in the traditional reserve and most likely would not have an impact on the author’s royalties. But what happens five or even ten years out? What happens when in the prior five years only ten returns were received? Why would 1,000 copies need to be held in reserve when the publisher can be confident that it will not receive even 100 returns?

Let’s continue to work with this example. What if the permanent reserve wasn’t as tiny as 1%–say 3% (3000 copies) or 5% (5000 copies). The numbers grow more and more absurd. A reserve is not supposed to function in this way. Let’s examine how the reserve is really supposed to function. In our example, we’ve shipped 100,000 copies and let’s say that 50,000 are reported sold. The publisher knows they’re sold—they’ve been paid for them, the large accounts have actually given the publisher sales figures from individual stores. Now the potential pool of returns isn’t 100,000 copies, it’s 50,000 copies. Of those 50,000 copies, let’s say 40,000 have been returned and credited. Now our 3% of shipments or 3000 copies is actually a reserve against 10,000 “unknown” copies. It’s no longer a 3% reserve for returns, it’s now a 30% reserve for returns. And, as the number of “unknown” copies decreases, this percentage steadily increases.

Obviously, a reserve set by a fixed percentage of net shipped is an unfair practice. A reserve should never be fixed; it should be based on actual experience. Publishers that employ a permanent reserve with a fixed rate based on gross shipments aren’t really using a reserve against returns at all, they are simply not paying authors royalties on every book sold, as promised in their contracts. It may be 99% or 97% or 95%, but it’s is not 100% and in some cases this can amount to a significant loss of income to the author.

The reserve for returns will continue to be an area of contention between authors and publishers. Publishers have the right to protect themselves from paying royalties on unsold copies. Authors have the right to be paid full royalty income on a timely basis and not be subjected to methods that unfairly deny them income. The clearest path to moderating this tension is for publishers to increase the flow of accurate, timely sales information to authors so the legitimacy of the reserve can be openly and objectively judged. Authors must accept that there will be instances where the publisher can legitimately delay payment of royalties until it’s clear that the books have actually been sold and will not be returned.

Last word—a reserve based on a permanent fixed percentage of books shipped is inconsistent with sound accounting practices and unfairly denies authors royalty income.

Royalties, mainly on the sale of paper based books, remain the primary source of author income. I’m going to explain the fundamental concepts you need to understand how they work and are calculated. The following is an outline, more like course notes, than a lecture. I want to keep this short and to the point, as my workshop will go into more depth about all these topics.

Let’s start with the basics. Royalties are wonderful. Royalties are the one thing that compensates you for all the difficult deals you have to accept in the course of your working lives as authors. Royalties are the safety net under the whole system.

Did you not get an advance? A $1 advance? A $4,000 advance? If the book succeeds and earns royalties, you can laugh about it. No matter how cheaply you sell a book, no matter how poor the prospects, no matter how pitiful the advance, as long as the royalty is strong, you do have a chance at realizing good income from that book. I’ll never forget the first time I held a six figure royalty check in my hand. It was the first royalty check I received for that book and it was 4 times the advance we got.

So what makes a strong royalty? Luckily, the royalty system, though under assault, is initially a good one for authors. The reason for this is that the basic royalty for commercial books is a percentage of the cover price of that book. If the cover price of a hardcover book is $20 and my royalty is 10% of the cover price, I am receiving $2 per book. That’s a full 10% of what the consumer pays.

Let me show you how good that really is. You may think the publisher is seeing 90% of that sale or $18, but that’s not so. The publisher does little direct selling, instead he must use bookstores and other distributors. To keep the numbers simple let’s assume he’s granting a 50% discount to everyone who will take the book, display it, and actually make the sale. This is not far off from the discounts many publishers do grant. So on our $20 book, he’s giving $10 to the bookstore and $2 to the author. That leaves $8, which per book isn’t bad. But then there’s the cost of being a publisher, which goes way beyond a good computer and a corner of the house. There’s rent, salaries, taxes, paper, print, binding, publicity, et cetera. Historically, publishers’ margins, the amount of money left over after expenses have been deducted, have been 10%. That’s about as small a margin as you can get in a relatively low volume business and still be in business.

So a percentage of the cover price of a book is a strong, fundamental position to be in. Authors and agents should do everything they can to perserve it. (More on that later.) Beyond showing you that the cover price royalty is so valuable, I want to contrast it with other royalty calculation systems.

There are large groups of publishers that do not pay a cover price royalty. In fact, a number of royalties in your commercial publishing contracts are not cover price based at all. They are based on the “amount received.” Structurally, this is a far less good royalty for authors.

An “amount received” royalty means that the author’s royalty is calculated on the monies that the publisher actually receives and not the cover price of the book. Academic publishers like university presses have traditionally paid on amount received. I’ve worked with a number of small and not so small publishers that only pay on the amount received.

Let’s go back to our $20 book. The publisher is once again granting a 50% discount to the bookseller. So the publisher is getting $10. Now my royalty is calculated based on the money the publisher is receiving. I’m now getting 10% of $10, not $20. So, now my royalty is $1 per book. This is half of my previous royalty. If the royalty system for commercial publishers ever shifted to this model, it would be a catastrophic disaster for authors.

I’ve used a very simple example to contrast cover price vs. amount received royalty. Of course, there are mitigating factors. The most important one is that academic presses do not grant 50% discounts, their upper limit is usually 30%. So, the amount received would be larger. There are other ways to also cope with the amount received royalty structure, which I routinely employ. I double the nominal royalty. So, if a publisher is unwilling to pay 10% of the cover price, I ask for 20% of the amount received. This isn’t a fantasy. I often get amount received royalties which are double the cover price royalty just to compensate my author for the different royalty structure.

Now that we’ve realized the value of the cover price royalty, we can better examine the full extent of royalties in a commercial publishing contract. The picture gets far more complex and troubling quickly. The cover price royalty usually only applies to sales of the book below a certain discount, in normal book channels. That means that many sales of the book are paid out under a different royalty structure, and that structure is usually on the amount received.

Let’s consider some of these.

All publishers sell their U.S. based books outside of the United States. As a general rule of thumb foreign sales–books exported to Canada and accounts all over the world that take English language books — account for 10% of sales. The average royalty here is often 5% of the amount received. That would equal a cover price royalty of 2 1/2% of cover price. That is a very small royalty.

There are other foreign or export royalties. Some publishers pay more than 5% of the amount received. Some publishers have special cover price royalties for large, overseas English speaking markets like Canada, the United Kingdom, Australia, New Zealand and South Africa. Large publishers that maintain full publishing operations in these large English speaking markets, plug their American books, which have multiple local cover prices actually printed on them, into their local distribution networks and pay cover price royalties in these markets. The local currency is converted and paid in U.S. dollars. These are attractive arrangements and attractive royalties, but only a few large publishers actually do this. So, the export royalty is a real problem. It’s true the freight costs of shipping overseas are higher. But that hardly accounts for the drastic royalty drop. Strong accounts in Canada, the Caribbean, etc., do well with English language books. I believe the export royalty is unnecessarily rich for the publishers.

Another major area of concern is discount. The cover price royalty only prevails below certain discounts granted to the bookseller or distributor. For hardcover books, it’s usually below 48%. For trade paperback books, it’s often below 55%. For mass market paperback books, it’s often below 60%. But these discounts vary widely from publisher to publisher. The royalty paid when these discounts are exceeded also varies substantially.

Let’s return to our basic example and see what happens when the “high discount” royalty clause is invoked. The publisher’s standard cover price royalty is paid below discounts of 48% percent. But for a substantial number of sales in our example, the publisher is granting a 50% discount. For each additional point of discount granted, the publisher is deducting 1 point of royalty. So at a 50% discount, 2 royalty points are deducted. We are now receiving an 8% royalty. So our original $2 per book is now $1.60 per book ($20 x .08).

It can get a lot worse than that, very quickly. Some publishers immediately go to an amount received royalty of 10% of the amount received when the discount is exceeded. I have in my files royalty statements from one particular publisher where a full 80% of all sales are made at the special discount (49% of more). As you can clearly see, there are financial incentives for the publisher to exceed their traditional discounts. They may be giving their distributors a better break, which isn’t a bad thing for customer relations, but who’s really paying for this break? If the author’s royalty is cut in half when the discount shifts one point from 48% to 49%, it certainly isn’t the publisher. Authors may not have an opinion about to whom and what kind of discounts publishers should grant to nourish their businesses, but they better take a very active interest in how discounting impacts their royalties.

Another important area to consider is the whole area of special sales and sales outside the trade. A lot of different sales are covered here, far too many for me to explore in this handout. Let me just enumerate the issues that demand your attention.

First is the concept of “outside the book trade.” The concept here is that because the publisher is selling outside of his normal channels of distribution, some special effort or some unique customer is involved and the traditional royalties don’t apply. This is a very tricky area if amount received royalties are being paid. The “normal channels of distribution” have changed and are changing rapidly. I don’t believe this is a valid concept and I think publishing contracts need to be policed so that full royalty are paid on all these sales unless they exceed the normal discounts.

Other special sales include premium sales, which are bulk sales often to a single customer, often not for re-sale. They are also often non-returnable. Again a 5% of amount received royalty is paid. This is another very profitable area for publishers. Similarly there are mail order sales and direct response sales, which again command the 5% of amount received royalties. There are also publisher owned book clubs, which similarly pay a low royalty. We can debate the economics of these sales. From where I sit, the author is making a substantial, excessive contribution to their success by taking such a small royalty.

Finally, we have the whole new world of electronic publishing. This is an area that is still taking shape and there is no industry protocol. There are competing technologies and new players of various sorts. As I write this I can identify three main new formats that need to be considered. The three formats I see are print on demand copies, electronic copies for reading in a stand-alone device and electronic copies that are intended to be read over a personal computer. Print on demand copies may pose no change to the royalty system, since they can be treated just like a printed book. Or, perhaps a new royalty is needed here. Electronic versions are far more unprecedented from a royalty point of view. Established publishers are treating them like paper bound books for royalty purposes and paying “standard” royalties. Some start up electronic publishers are paying royalties of up to 50% of the monies received for each sale. Space forbids me from fully articulating my views here. Suffice it to say that we must be vigilant in making sure the new royalty protocols for electronic books are advantageous to authors.

There are two other areas I want to mention to round out the royalty issue. When we talk about royalties, we’re talking about money and when we’re talking about money we’re talking about the most basic business concept “cash flow.” This is not a hard concept to understand. You all innately understand it. It’s having the money you need when you need it. Not 3 months from now, not 6 months from now, NOW!

Cash flow is effected by when a publisher begins to pay royalties and how quickly they are actually paid out. Some publishers won’t pay royalties until they have at least 6 months of sale on a book, some don’t require that. Some account to authors within 60 days after the close of a royalty period, some enter into the 5th month after the close of a royalty period before they pay out. All these things do affect your income.

The final area I want to mention is returns and the reserve for returns. The publishers struggle with one very basic fact of their doing business: when they ship a book to an account, it is not a sale. It is essentially on consignment. Books are fully returnable, usually indefinitely. That means that if an account returns all 20 of the copies of our $20 book to the publisher, the publisher makes no money, and, in fact, has lost money on shipping it both ways, plus the loss of income from having no sale anyway. Because books are returnable, completely at the publisher’s expense, it has been traditionally very difficult to know exactly how a book has done. You may know where 80% of the copies are, or even 90%, but you certainly don’t know where 100% of the copies are. They may be sold or they may be returned one year or more after shipping. The reserve for returns, which literally means some “sold” copies are “reserved” or held back from being paid as royalties to the author because it’s not really known whether they have sold or not.

Returns dramatically add an element of complexity, uncertainty and controversy to royalty accounting. There have been abuses. When a royalty accountant looks at some basic numbers, it’s often a matter of interpretation to determine how many books have actually been sold. Because thousands of dollars of the publisher’s money is at stake, any royalty clerk who wants to keep their job is bound to be conservative. But that can savage author incomes. If a book is selling well, continues to be reprinted and averages a total return of 10% over the first year of sale, how can an industry average of a 30% reserve be justified? It can’t. But I’ve seen it. A few years back there was a legal settlement that revealed that one publisher was essentially keeping a permanent reserve of 30% on all their books, regardless of their real sales history.

There is an antidote to the issue of excessive reserves, though it’s difficult to apply. Authors should maintain accurate records and aggressively seek sales information on their books. Royalty statements must be carefully examined to catch mistakes and to track the actual sales experience of a book. I routinely write letters of query to publishers when I find anomalies in royalty statements or when a statement does not conform to my sense of how a book did. Two years back one such letter resulted in a check for $7,000. Stay on top of your royalty income and potential.

I hope this basic background information gives you a better sense of how important royalties are and how they operate. This will continue to be a dynamic, complex, fundamentally important area of author concern. Protect your income by advocating for practices that preserve and increase author royalty income where appropriate.

For the career writer, “artist” or “entertainer” remains a perennial problem.

I use the term “artist” to distinguish the most personal, creative goals of a writer. The “artist” wants to tell the stories that the writer wants to tell, regardless of their commercial viability or any other external value. Every writer has an “artist” inside them.

The “entertainer” distinguishes the writer’s need to cater to her audience. The “entertainer” wants to be loved, respected, valued and compensated. The “entertainer” wants to know how her stories are being received by the audience, it’s the ear that’s turned outward, listening for every laugh, titter, clap, sigh and boo from beyond the footlights. Every writer has an “entertainer” inside them.

The conflict between “artist” and “entertainer” represents a serious, ongoing emotional challenge for the writer. I don’t want to address this because it’s too personal, every writer is on his or her own journey and I’m not sure I could say anything valuable.

I do want to address the concrete, practical dilemmas that writers face around this issue.

First, let me sketch for you the gospel of commercial publishing. I believe that what I’m about to write plays into the goals of all the major publishers. I’ve heard it from their lips many times and in my own analysis I see it in their behavior.

The chief goal of all fiction publishers is what I would call “franchise publishing.” They do not want to publish one book by a writer. They do not want to publish a number of very different books by a writer. Their ideal writer originates a character, a voice or a fictional world so compelling that they create a fan base for this entity. With this valuable entity now established, they want the author to ride it as long and as deeply as possible. As a practical matter, they are not interested in the artist, but the entertainer. Give ’em what they want is the motto here. Create a “franchise.”

This worldview permeates the philosophy of all genre publishing and reaches into the literary world as well. Mystery publishing is a pristine example. Mysteries editors more often buy series than “books.” They believe it’s so hard to establish a writer, the initial shipments of the first book are so small, that they must spread their risk and the authors chance, over a number of books. It is a sound publishing philosophy. It’s the single most important philosophy out there. All writers must live with it, understand it, and even exploit it for their own good. I am not writing to criticize this philosophy, but to point out the conflicts it creates for the writer.

Franchise publishing conflicts with the goals of the writer as artist. Let me share two specific instances that brought this home for me for writers that I represent.

One writer is an up and coming writer in a certain genre. She delivered a manuscript on spec to her present publisher because the publisher wasn’t happy with the original outline and the publisher did have enough of her books accepted so that they did not have to commission a book at that juncture. The writer went forward with the book because it was important to her and felt creatively that this was the book she needed to write. When completed, the publisher wasn’t really taken with the finished book.

This writer had previously originated a fictional world that was quite successful. As it rejected the spec manuscript, the publisher requested more books set in this world and had been doing so for some time, making it clear they believed this was the best way the author could advance her career. The author had already sold them a few other books not set in this world, but remained convinced that these books were the way to go. The author did have ready an outline set in this fictional world and we did conclude a deal to write one additional book in that universe. The advance we got was a substantial increase on her previous advance and that increase did represent the publisher’s belief that books set in this universe were worth more than any other book the author could write. The book that was rejected is being shopped elsewhere and the author’s dilemma remains in place. She wants to write the stories she finds compelling, she also wants to succeed.

Another writer I represent faced a similar dilemma recently, at a much earlier stage of his career. He sold a first thriller for a modest advance to a good house that is publishing it in hardcover. The opportunity is a good one. He delivered a new outline for his second book, using different characters than the first book. Before replying to the new outline, the editor asked us why the 2nd book did not utilize the same characters from book one and was not set in the same universe. The editor articulated the franchise publishing philosophy almost exactly as I’ve described it in this article.

After some real soul searching and even writing a second outline set in the original world, the author decided to stick with the new outline with the new characters. We received a modest offer for the second book and as of this writing, the author has decided not to go under contract, choosing to write the second book on spec. With publication a few months away and his own very serious marketing plan in place, this author would rather wait and see if he can establish himself at a level where he may have the freedom to write a second book more of his own choosing or get a substantial advance based on the success of the first book. He is also writing the new book, so when the first book is published, he will be ready to contract for the second immediately and be published one year later, not missing a turn. Authors are sometimes given the advice to never write on spec. Here are two instances where it seems to me, writing on spec was the right decision.

These are just two examples in the real world of the real dilemmas writer’s face. I wouldn’t suggest any hard and fast rules here. Franchise publishing is a legitimate goal for any writer. Know yourself and think about your choices. Apprenticeships are common in many businesses, accept the fact that you may have to write a number of books as an entertainer to earn your shot as an artist. Don’t be afraid to dig in your heels either. You may have to switch or add a publishing house or work under a pseudonym or find some other way to have certain of your books published. I would encourage writers to be flexible enough to work for love and money. Each demand sacrifice. Each has rewards. I never advise writers to drop their favorite projects regardless of market conditions. But if market conditions are unfavorable, you may have to live with an unpublished manuscript.

I don’t predict the future. In fact, I’m sick of hearing predictions about the future. It’s almost the only thing you ever read anymore. As an agent, I try to predict the present. To do so, I’ve done a lot of work lately researching the impact the Internet is having on writing and publishing. And, in doing so, I see a trend that could hurt the nonfiction writer’s income. I don’t have a lot of hard data to back up what I’m going to say here, but I think for many authors it may have the sting of recognition.

The free availability of information on the Internet may dilute the earning potential of nonfiction books. The Internet itself has become a competitor.

Nonfiction authors earn their money by creating new proprietary information. They create something unique, for sale. They are paid for their “product.” That is the fundamental avenue of income for the individual nonfiction writer. Whatever formats this unique product appears — printed book, audio book, movie adaptation, etc. -? he/she is still selling the same “product.” Any of the companies that the author sells to, who in turn offer the “product” to the consumer, are selling the product and receiving direct compensation for it. The author’s earnings are tied to this very sale.

The Internet presents a different business model. It is, for the most part, a free medium when it comes to access to information. Most people don’t pay to read things off the web. Most companies on the Internet are not in the business of selling an author’s unique product to the public; they give it away. These companies make money by selling advertising space and other — often non-book related products. Other “companies” aren’t companies at all; they are government agencies, universities, charities and hobbyists who also freely give out. They aren’t interested in making money at all in the conventional sense. So, the product, which the nonfiction author has worked so hard to originate, research and write and for which he/she is the proprietor of, is competing against an entity that is doing comparable work and not selling it at all, but giving it away for free to support its other income streams.

Do you write nutrition books? There are websites offering free nutrition information in return for third party advertising and product sales. Do you write health books about serious illnesses? Literally hundreds of expertly prepared websites and databases offer information for free. Do you write cookbooks? There are plenty of websites giving out recipes and cooking instructions.

The point is, with all these sources of free information, why would a consumer pay for it? With these “publishers” unconcerned with selling the product, since they make money from advertising and non?related product sales, the nonfiction writer’s income is almost certain to be reduced. The Internet threat goes beyond the free access culture that surrounds it. Because it is so easy and ubiquitous and because information is available from so many sources in such small pieces, it threatens the raison d’etre for many book purchases. If you need questions answered about health, cooking, finance, etc., you don’t have to buy a book, you can pull it off the web.

Initially, nonfiction writers may find that websites are good customers. They are commissioning original material. But, unlike traditional publishers, websites won’t pay royalties or share income in any other fashion. (Their business model makes income almost impossible to share.) Furthermore, as their area of expertise is being overrun by no?cost competitors online, it’s likely that nonfiction writers will find that it’s simply harder and harder to land book and other deals that have good income potential. The demand for information may grow but entry and profitability may become very serious questions for non?fiction book authors (not like they haven’t been). Depth, insight and presentation may become of even greater virtue as nonfiction authors compete against websites giving away loads of free information.

The Internet has the potential to help nonfiction book authors. I don’t want to slight that here. Buying books online is a big business that must be adding additional sales. Online book promotion has great potential. Research is easier. In all, if I had to judge the pluses and minuses, I’d have to consider the Internet a plus. But that doesn’t lessen the challenge I’ve diagnosed in this short essay.

I’m not a pessimist and I hope I’m not being an alarmist. I can’t point to a single sales statistic that bears out my views. Yet. But I see the way I “buy” information and I have heard hundreds of similar stories. More and more people are turning to the Internet for information about health, nutrition, cooking, vacations, etc., and not the bookstore. Nonfiction authors must re-evaluate their opportunities as this trend grows.