Mike Shatzkin is Wrong About Amazon’s 100% Revenue Offer to Hachette Authors

4243188382_e5176cb75c_b[1]Earlier this week Amazon stunned the publishing world when they sent a letter to agents and authors affected by the contract dispute with Hachette. That letter, which was soon leaked to the press, included details which suggested Hachette was not negotiating in good faith, and it offered to remove authors from the conflict by giving them 100% of their respective Kindle ebook sales.

Hachette quickly declined the offer, thus achieving Amazon's real goal of no longer being the only bad guy in the fight. But as the story percolated through the media, any number of arguments were made in favor or against Amazon's proposal including one from Mike Shatzkin.

Shatzkin argues that the advances that most of the authors had already received made it impossible for Hachette to agree to Amazon's offer. I don't see the logic of that argument:

What the deal elides — as does almost all the “analysis” about how authors fare with big publishers versus how they fare with Amazon — is “unearned advances”. For the biggest authors with the biggest sales of print and ebooks, Hachette has already paid the ebook royalties at more than the contractual “25% of publisher revenue” rate.

So we have a $10 ebook. Normally, Amazon would pay $7 to Hachette and keep $3. Hachette would notionally divide the $7 as $5.25 to Hachette and $1.75 to the author. What Amazon proposed was that the author would get the whole ten dollars, Amazon would give up its $3 and Hachette would give up its $5.25. Not quite fair, and, to be honest, I hadn’t even done that math when I spoke to the reporter.

But the math is worse than that because Hachette has already paid the author’s $1.75 in the advance for the lion’s share of the sales that would be made under this deal if it were agreed to. So Amazon is giving up $3 and Hachette is giving up $7 on most of the books. And many of the authors, frankly, aren’t entitled to even their own share on those sales (they already got it), let alone Hachette’s (or Amazon’s).

To put it in its simplest terms, Amazon is proposing to give Hachette authors ebook revenues to which they are not entitled under contract.

Shatzkin is saying that Hachette can't agree to this because it would involve giving authors ebook revenues to which they are not entitled under contract (they already got the revenues in advance).

Yeah, that argument doesn't stand up to scrutiny.

If you had told me that Hachette couldn't afford it, I might agree with you. Kindle ebooks account for 18% of Hachette's US revenues (see the postscript), and I am not sure Hachette could afford that kind of hit to their pocketbook.

What's more, Hachette is already taking a hit in the ongoing contract dispute with Amazon (with the tacit approval of Lagardère). Amazon has been responding to what they say is Hachette's refusal to negotiate by reducing the number of copies if Hachette titles stocked in Amazon's warehouses, reducing discounts, and disabling the pre-order buttons. This is costing Hachette sales, and the publisher will likely report a significant drop in revenue in their next quarterly report.

TBH, we all know they were never going to; it's just too big of a hit. The cost of the positive press was too high, and I'm sure many would say that the damage resulting from declining the offer will likely be minimal. Almost everyone hates Amazon, after all.

P.S. According to Lagardère, Amazon accounts for 60% of Hachette's ebook sales in the US, and ebooks make up 30% of US revenues. Thus, Kindle ebooks are 18% (ish) of Hachette's US revenues.

image by Tobyotter

About Nate Hoffelder (11481 Articles)
Nate Hoffelder is the founder and editor of The Digital Reader: "I've been into reading ebooks since forever, but I only got my first ereader in July 2007. Everything quickly spiraled out of control from there. Before I started this blog in January 2010 I covered ebooks, ebook readers, and digital publishing for about 2 years as a part of MobileRead Forums. It's a great community, and being a member is a joy. But I thought I could make something out of how I covered the news for MobileRead, so I started this blog."

12 Comments on Mike Shatzkin is Wrong About Amazon’s 100% Revenue Offer to Hachette Authors

  1. Lost in the whining over the Amazon offer is the rest of the letter and the timeline exposed in it.
    Hachette has no contract with Amazon so Amazon is already doing them a favor by selling them.
    Amazon’s proposal (which nobody expected Hachette to agree to) is but a prelude to the inevitable delisting of all Hachette titles.
    At that point Hachette gets nothing anyway and neither do their hostages.
    And since there is neither contract nor ongoing negotiations, Amazon is 100% within their rights to do so.
    They are not a common carrier (in FCC terms) nor a charity.

  2. Nate,
    You completely miss Mike’s argument. The problem is not affordability, but ethical- and tied to contract law. Hatchett has multiple contract types with various authors and a significant number of authors have already been paid. Would you accept a deal to pay someone twice for the same product?

    Mike’s quote above indicates this at the end where he says they aren’t entitled to it. His argument above is not about affordability, but ethics and law.

    • “Would you accept a deal to pay someone twice for the same product?”

      Actually, Amazon is proposing to pay authors something like 5 or 6 times for the same product. So no, the extra money authors may have received in advances doesn’t really affect the calculation.

      And no, there’s nothing in the contracts to stop Hachette from overpaying authors – if it chose to do so.

      • And the money is coming from Amazon’s pocket.
        It’s not like the pool proposal where Hachette had to pay out of pocket.

        • Wouldn’t it?
          The author gets 1.75 and Hachette 5.25, normally, but with 100%, the author gets 7, Hachette gets, what? absolutely nothing? or the usual 5.25, because then it would mean Amazon paying 7 + 5.25. Unlikely.
          So, this is just a cheap shot from Amazon trying to get authors to break their contracts. Which they can’t. Meaning it’s all a publicity stunt and nothing more.

          Also it kind of points out why Amazon is really getting out of control and needs some government regulation.

          • Hachette is going to get nothing anyway, unless they start negotiating. The delisting is coming.

  3. Dude, you have ZERO idea of how corporations work, do you?

    “But since Hachette is part of a 10 billion dollar a year conglomerate, they are not entirely dependent on their own pocketbook. They could fall back on the support of the French media conglomerate Lagardère to make up Hachette’s US losses.”

    Um, NO. That’s NOT how corporations work. Each business unit is expected to pull its own weight. Each business unit has its own P/L, revenue targets, liabilities, legal obligations, etc. The executives in charge of the business unit are judged on how well THEIR DIVISION PERFORMS, not as a whole. While, yes, Hachette US contributes to Lagardère’s overall bottom line,conglomerates are not charities. Hachette US is expected to pull its own weight, perform within its own budget and make its targets.

    There are all sorts of accounting laws and other regulations that apply as well. Just one example, the Sarbanes–Oxley Act (and Amazon’s offer might very well be construed as a bribe to settle a business negotiation). It’s also been pointed out that legally, Hachette’s contracts with its authors would need to be individually scrutinized to make sure accepting such an offer doesn’t violate terms and open up Hachette to potential further damages and liability.

    Congratulations! This is one of the most ill-informed things I’ve read on this subject all week. And considering you’re competing against Howey and Konrath: well done, sir. Well done.

  4. The answer to the moral/ethical question is for Hachette to use the payments to recoup the unearned advances. What author with an unearned advance remaining wouldn’t want to pay it down faster?

    In any case, Eisler’s take is here: http://barryeisler.blogspot.com/2014/07/amazon-cancer-cure-stunt-to-separate.html

  5. Maybe it’s too early in the morning, but it seems that Shatzkin has it all wrong (other than Nate’s point). Shatzkin does the math on the royalty flow to big authors. In general, the biggest authors will sell out their advances, so they wouldn’t be being paid for royalties that they haven’t/won’t earn.

    It’s the small authors that Shatzkin should be doing the math on, as they are unlikely to sell out their advances, and therefore, they would be over-receiving royalties under Amazon’s plan.

  6. The percentages are just a smoke screen, if Hachette claimed directly that they declined because the percentages weren’t fair then Amazon would offer to pay 50/50 (they’ve already offered this). Instead they get their media mouth pieces to spin it for them.

    The advance argument is really saying that the majority of the authors aren’t hurt by these negotiations because their contracts are written in such that they don’t earn out the advance anyway. If it was a sincere argument it should have been made when the authors were complaining about being victims and not when Amazon offers to compensate them.

  7. William Ockham // 11 July, 2014 at 5:08 pm // Reply

    I am not a lawyer, but my understanding is that Hachette’s contracts for ebook royalties is that they are based on net receipts. Under Amazon’s offer, Hachette authors would accrue nothing towards their royalties for these sales because Hachette is receiving nothing. Amazon’s payments to the authors would be outside the contracts completely. Shatzkin is correct that the authors haven’t earned it. It would be essentially a gift from both companies but the checks would come from Amazon.

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