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