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For those outside the publishing industry, the inner workings of the industry are wrapped in mystery. 

  • How do books get published? 
  • Who decides which books get published? 
  • How well are books actually selling? 
  • How much money do authors really make? 

Once you get into the industry, you learn a bit, but not as much as you might think. Much of the information is still secret, and sometimes, it’s not even shared between people in the same company. 

In secretive industries, secrets are typically leaked through hacks,

whistleblowers, and court cases. The gold standard of the three is court cases. Hackers and whistleblowers have complicated motivations, but courts have the power to put people in jail for perjury, so the information presented in the trial tends to be very reliable. 

Cases involving big publishers rarely go to trial because big companies of all sorts dislike having their secrets publicized.

When one of the largest publishers in the history of publishing was taken to court by the Department of Justice, we got a rare peek at the publishing industry’s secrets.

Penguin Random House attempted to acquire Simon & Schuster, but the Department of Justice sued to stop the merger. The case went to court, and publishing secrets were brought to light. The court case lasted for three weeks. Many secrets were revealed, and much dirty laundry was aired.

What did we learn about the inner workings of the biggest publishers? 

Some of the best journalistic coverage of the DOJ v. PRH case has come from Jane Friedman’s Hot Sheet newsletter. It’s the only publishing industry news I pay for. 

I interviewed Jane Friedman about the trial and what we learned.

Why did the trial happen in the first place?

Thomas Umstattd, Jr.: Can you give us some background for why the trial happened in the first place?

Jane Friedman: Well, this case was an action by the government on antitrust grounds to stop the merger of two of the Big Five New York publishing houses. It was unique in that it wasn’t pleading harm to consumers. Instead, they were trying to prove harm to authors.

That made the case highly relevant to all kinds of authors and to me.

More than proving harm to authors in general, the case was focused on the top 2% of authors, which was made clear from the outset.

The top 2% of the authors were people who earned six and seven-figure book advances. Those are the deals where the authors are terribly concerned with book sales because they and their agents are focused on getting their money upfront in the form of an advance.

The government was trying to prove that the top 2% of authors would see a decline in their advances. That was the case, and it was successfully argued.

Thomas: The top 2% of authors referred to traditionally published authors. It excludes from its sample the 50%-80% of independently published authors, most of whom are not making $250,000 per book.

It might be more like the top 0.1% of authors, depending on your sample size.

Jane: Yes. If we want to get really strict about it, it may be 2% of deals or contracts. They calculated all of this through their discovery, and they had to stop somewhere. They were mainly looking at the biggest publishers when they were making these calculations.

The Pareto Principle and the Publishing Industry

Thomas: This trial demonstrated how much the publishing industry is governed by the Pareto distribution.

We’ve all seen the bell curve distribution where you’ve got the average in the middle, and the bell’s tails curve off toward either side.

The Pareto distribution is like that bell curve chopped in half. A tiny percentage of people make almost all of the money, and everyone else makes almost nothing.

You tend to see Pareto distributions where there’s a feedback loop. The more you have, the more you get. It works the same with celestial bodies. The more gravity it has, the more stuff it can pull into its orbit, which makes the gravity stronger and allows it to pull more into its orbit.

In the publishing industry, the more money you have, the more money you can make, which gives you more money.

That distribution is hard for us to wrap our heads around.

What were some surprising Pareto distribution elements this trial brought forth?

Jane: As someone who’s studied the industry for over two decades, I wasn’t shocked by much. However, the general public and many authors were surprised.

For example, there was often this sense that “the emperor has no clothes” because the biggest publisher in the country was essentially arguing, “We’re not that good a business. There’s so much luck involved, and we can’t predict the future. You can’t even take credit for it when it works.”

There were contradictory attitudes on the stand from people working at the same companies. I have a lot of sympathy for where those people are sitting in the business because it is really hard to predict a bestseller.

Jane: One thing both sides agreed on is that most books, some 85%, fail. A book that “fails” is one that simply didn’t live up to the publisher’s expectations.

The book could have been a success for the author in some regard. Being deemed a “failure” by a publisher doesn’t mean the book was of terrible quality. It just means that it didn’t necessarily contribute to the publisher’s bottom line in a way that would make the company or the business sustainable over the long term. If every book performed like that, the publisher would go out of business.

Thomas: Predicting success isn’t so much predicting whether a book will be popular or not. Publishers are trying to predict how popular it will be.

If you’re anticipating that a book will sell a million copies in the first few months, you’ll have to print it in China so that your cost-per-copy is around $1.00. Then, you’ll have to ship it on a slow boat to the US. You end up with really cheap copies, but you’ve already spent $1 million in printing before you’ve sold a single copy.

If the book only sells 200,000 copies, that means $800,000 in books are sitting in a warehouse somewhere, and the entire profit margin on that book may be lost.

On the other hand, maybe you were anticipating the book would sell 20,000 copies, but there was demand for 200,000. As a result of your prediction, you missed out on the sale of 180,000 books.

Because of the nature of printing and the consolidation amongst printers, you have to predict the future, and that’s really hard.

Jane: Since the pandemic, publishers have had to really take much more calculated risks and pull back on the number they’re printing.

Even when I was working in traditional publishing, we were trying to reduce our warehousing and inventory costs. We were trying to move to just-in-time printing, which was a disaster during the pandemic for lots of reasons.

Thomas: Just-in-time is corporate speak for “very fragile supply chains.”

Jane: Exactly. But that’s where the industry is. Huge, powerful corporations like Ingram are pushing publishers to do print-on-demand and use fulfillment that doesn’t rely on fragile supply chains.

But publishers are having to be more disciplined, especially with some of the changes happening with Barnes Noble, where they no longer take books on a pay-for-display basis. Marketing is obviously changing.

Thomas: Until recently, to have your books displayed in Barnes and Noble or an airport bookstore, you only needed to get on the phone with the right person and write a check with the right number of zeros.

Barnes and Noble have realized, at least from my perspective, that too much decision-making is happening centrally, and they’re not accommodating local tastes. They’ve finally discovered that New York is not representative of the whole country and that readers in Cincinnati and Albuquerque want different books.

If they allow their local stores to make their own buying decisions, they can better serve their local audiences, which will result in selling more books. That method works better than having somebody from corporate saying, “You have to put this book on the shelf because we got a big check that says you have to.”

That has really changed the game. Now, you must earn your way onto the Barnes Noble shelves.

However, if you want to pay to get placed, many other bookstores, airport bookstores included, will happily take your money.

Is it true that only 2% of revenue goes into marketing?

Thomas: One of the big surprises to me was that only 2% of revenue goes into marketing. Is that true?

Jane: Yes, it is true. If you compare that to other consumer goods industries, it does seem paltry. One colleague of mine really pushed back on the idea that 2% toward marketing was a failure. He said there are a lot of books you wouldn’t put a lot of money behind for lots of different reasons.

There’s a lot of marketing that happens in the traditional publishing ecosystem that isn’t assigned a dollar amount. How can you apply a dollar amount to the fact that your book is listed in a publisher’s catalog that’s being seen by thousands of booksellers and librarians?

How do you put a dollar amount on having nationwide distribution and certain mass retailers? He made the argument, which I think was sensible, that we’re really talking about the 2% of hard costs related to advertising or merchandising or sending out advanced review copies and things of that nature.

Few authors see the invisible support network that big publishers have been working on for more than a hundred years. It does have an effect, but if you just look at the budget item for the marketing of books, it is quite low.

Thomas: As a marketing professional, that tells me these big publishing companies aren’t able to scale the marketing. The low-cost marketing tactics they’re implementing, such as listing a book in a catalog, are working. However, if they wanted to spend more money, they don’t know how to do it profitably.

Publishers should want to spend more money on profitable advertising. For example, if you spend $1 million on ads and bring in $2 million in profit, you want to spend more so you can earn more. You want to keep pushing it until you find that equilibrium point. But if the advertising isn’t working, then you don’t want to waste the money.

There’s a disconnect between the big publishing companies and the consumer. Publishers don’t know how to reach their consumers even if they have the money to spend. If you gave them a check for $1 million, they wouldn’t know how to spend it.

They might say, “We’ve already bought all of the airport bookstore space we can buy, so I guess we’ll spend it on Facebook ads.” If they don’t know how to advertise profitably and aren’t sure how to target, who to target, what messaging to include, and which regions will respond, that money can disappear.

Facebook can make money disappear faster than anybody.

The Achilles Heel of the Biggest Publishers

Jane: You’ve just identified the Achilles heel of the biggest publishers with lots of different imprints. They’re publishing in every conceivable category, which makes every book unique in that it has to reach a different audience.

The audience for an erotica book will be different from the audience interested in a book about financial health.

Publishers have been accustomed to making books pop with industry insiders such as librarians, booksellers, reviewers, and tastemakers. Today, it could be TikTok influencers. Publishers have honed their skills at getting books in front of those people. Obviously, the landscape has changed in the last 20 years, which has made things increasingly challenging for publishers who are still using old methods.

Authors still tend to want some of those more traditional efforts for their own books. For example, many authors want to see their publisher advertising in the New York Times even if it doesn’t work to move books.

Almost everyone agrees that even if you get a review in the New York Times, it doesn’t necessarily move the sales needle. An ad would perform even worse.

I have some sympathy for the publisher’s predicament because the big publishers are publishing books that all have different audiences. They haven’t been built in a way to capitalize on prior knowledge or prior wins for those audiences. If they’re publishing 1,000 titles every year and each one requires a unique marketing plan, they don’t have enough staff to facilitate that.

As a result, and this came out in the trial, they’ve adopted a wait-and-see attitude. They just wait and see how the market responds. They’re going to wait and see if it gains traction somehow on its own, maybe by luck or because of the author’s efforts. If it gains traction, they’ll start putting money behind it, but that is no way to market.

Thomas: If you’re an author with one of the Big Five traditional publishers that are using this strategy, that means they will spend zero money on your book, and your book launch is all on you.

If you do your homework and have a good launch, and your book is “doing numbers,” suddenly, marketing money becomes available. But if your book is not doing well, no marketing money is made available.

To him who has, more will be given, and to him who does not have, even what he thinks he has will be taken away.

As I’m fond of saying, “To him who has, more will be given, and to him who does not have, even what he thinks he has will be taken away.” That’s a feedback loop, and that’s what creates the Pareto phenomenon. That’s why a small percentage of authors make most of the money.

Authors must prepare for the book launch. I often see authors sign a contract and then sit on their hands for 12 months until their book comes out.

Savvy authors use that intervening time to prepare for their book launch. If your book has a strong launch and “does numbers,” marketing dollars will be allotted to it.

But if you don’t prepare, even if you’re with the biggest house in the world, they may not spend a penny to help promote your book until you’ve proven that you’re worth it.

Jane: In the past, agents have tried to get the biggest advance possible to apply pressure on the publisher to be proactive and do something to recoup the investment. But that isn’t a great strategy either.

Thomas: I don’t think it works anymore because the staff turnover at publishing houses is so high. Between acquisition and launch, half the team has changed.

I was talking with one author who’s been on various bestseller lists for 20 years. He’s got some evergreen books that sell every month. His super-hit is still selling like crazy.

He’s such a big author that he was assigned his own marketing director and had their cell phone number. He was the publisher’s big fish. I asked him how many marketing directors he’s had in the last 20 years.

In 20 years, he said he’d probably had about two dozen. That’s more than one marketing director per year. Most publishers have a rotating door, and their staff come and go.

How did they explain the purported decline in ebook sales?

Jane Friedman is the Editor and Founder of the Hot Sheet.

Thomas: One fact that came out of the trial was that Penguin Random House had no organic growth in ten years. All their industry growth has been external.

Jane: Yes. I thought that was astonishing. It points to some sort of dramatic failure. One could blame the overall ecosystem, but we can’t look inside all publishers and see if this was on par with everyone else.

However, there was a chart that did not get mentioned often, but an astute person in Canadian publishing, Kenneth White, has mentioned it multiple times in his newsletter.

He points out how genre fiction sales declined precipitously from 2011 to 2021. The chart was broken out by genres like fantasy, mystery, and romance. It showed a 75% decline, and I don’t think it was even discussed at the trial because it was somewhat irrelevant to the larger point.

I think that decline can be attributed to self-publishing. I don’t think you can find any other reason for it. Some might point to ebook lending or subscription services, but I see the rise of ebook reading and self-publishing as contributing to some of the publishers’ problems with organic growth.

Thomas: As a genre fiction reader, I can attest that ten years ago, most of the genre books I bought were traditionally published. Now, probably 70% of the genre fiction books I buy are independently published. Brandon Sanderson is still traditionally published, so he counts. Although, I bought his most recent books from him directly through his Kickstarter campaign.

I’ve been reading a lot of lit RPG lately, which is the hottest genre in fantasy and sci-fi right now. Nearly all the lit RPG authors are either independently published or are published in very small houses. So, that entire mushroom has grown out of nowhere very quickly.

I don’t think the big houses have acquired any lit RPG authors. Maybe they’re starting to sign them in back rooms that I don’t know about, but none of the books I read were published by a big house.

If you’re writing genre fiction, much of the prestige of being published by a big house doesn’t actually help you sell more books because genre readers don’t care about the publisher as much as they care about the price. Indie authors can be much more competitive, especially on ebooks.

All the growth in ebook sales is due to indie authors.

Jane: There’s a big-name consultant outside of the publishing industry who is always crowing about how ebooks never took off even though so many people said ebooks would change the industry. Then he points to the chart that shows they’re only responsible for 25% of sales.

But that data doesn’t reflect the fact that traditional publishing has priced ebooks to keep sales low. They’ve lost this market share because self-publishing authors are pricing in a way that’s competitive and has allowed them to steal away this market share in part.

Thomas: Traditional publishing doesn’t have visibility into the numbers. BookScan doesn’t actually know how many ebooks are sold. They just ask the publishers to self-report. “Hey, Simon & Schuster, how many copies of this book did you sell as an ebook?”

The problem with that method is that there’s no data collection of the indie ebook sales.

BookScan shows ebook sales as flat or down. But if you look at k-lytics, ebook sales are going through the roof. All the growth is experienced by indie authors, not by traditional authors.

Jane: Exactly. BookScan does have a good print tally because print book sales are captured at the checkout. They can say what’s selling in print because they’re tracking Amazon, Walmart, Costco, every chain, and every indie store. However, all ebook sales are self-reported by a selection of publishers.

Did we learn anything surprising about author royalties?

Thomas: Author royalties were the big focus. Did we learn anything new?

Jane: One of the classic findings from the trial was that most authors are not earning out the advance.

As far as royalties go, there was entertaining testimony from agents and authors alike. It was very strange because there was so much confusion about how these numbers work in publishing. Few people realize that publishers effectively overpay for books all the time, knowing that it’s still going to be a profitable book for them. They’re effectively, knowingly paying a higher royalty rate.

One of the best things the judge wrote in her opinion related to this was how big publishers really don’t negotiate on some of the most important deal points.

She stopped short of calling it collusion, but I think it could be. There could be a case that ebook royalties are all at 25%, and they don’t really change.

Every traditionally published author is expected to fork over the ebook and the audiobook rights. It’s hard to get a deal if you don’t. Details like this mean that if publishers want to give you a deal you’ll find attractive, they’re not going to give you more flexibility. They’re just going to pay you a higher advance because they won’t pay you a higher royalty.

Thomas: During my short time as a literary agent, I found that fascinating. As an author, if I’m confident that my book’s going to sell, I care less about the advance because I know I’ll earn that on the back end in royalties.

Of course, as a cynical agent, I know that books never do as well as the author thinks they will, and I want as much money upfront as possible, so I’ll negotiate a higher advance.

But you’re exactly right. Publishers rarely are willing to negotiate on the royalty. When they do, it’s often in pie-in-the-sky elements of the contract that say, “If you sell a million copies, then your royalty will increase.”

It does seem like collusion, but soft collusion.

Illegal collusion happens in backrooms where everyone agrees to set the royalty at 25%. Soft collusion happens when there aren’t enough players in the market, and everyone just matches everyone else’s terms.

Authors don’t have enough leverage to get publishers to budge on royalties. But if a publisher dangles $1 million in your face, you suddenly don’t care much about royalties. 

Jane: Precisely.

Most books only sell how many copies?

Jane: Another statistic that was thrown out casually was that most books don’t sell more than 12 copies. It seemed like a ridiculous figure, and there was a lot of specificity tied to it, but no one ever returned to it in the trial. think it was cited by an attorney as he was trying to get information out of one of the analysts, but no one challenged the figure.

When I mentioned that figure in my reporting, it caused a lot of angst from the Peanut Gallery on social media. There was some pushback that it couldn’t possibly be true. But the fascinating thing about the argument was that one of BookScan’s analysts came out of the woodwork to address it because it was generally assumed the figure must have come from BookScan. You would have to be looking at a large number of publishers and titles to be able to come up with an average like that.

She said, “Okay, here’s how I think they might have gotten that statistic. It’s not the majority of titles, but it’s probably something like 19%.” But that did not make people feel better.

Thomas: That’s a specific percentage. It means that if you’re published with one of the big publishers, there is a one in five chance you will sell 12 copies or less.

If you understand the Pareto distribution, you know that if you raise the number of copies to 50, then you have something like a one in three chance of selling less than 50 copies. Again, you see a tiny number of titles that are making up most of the sales. The whole industry is a handful of people who are making all the money and supporting all the other authors who are effectively making no money.

Jane: It might not have been 19%, but it was like something like that, and it was not a reassuring figure regardless of how low it was.

The big takeaway was that most books don’t do that well, and they don’t do well in the places that a typical author values.

Some people assumed the figures were low because they didn’t count libraries or bulk orders. There may be a dozen different things BookScan can’t track, but most authors want to see their sales happen through a bookstore to a reader.

I think there’s more truth than myth in the statistic. I think it’s a nice wake-up call. Only one in five people in the United States can be classified as avid readers, meaning you can actually market a book to them, and there’s a good chance they’ll buy it if it’s in the category or genre they enjoy.

One out of five.

I recently had a conversation with Peter Hildik Smith, an analyst who does consumer research. He takes publishers to task for not doing consumer research and for not supporting the books so that they do sell well when they launch.

He reiterates that it takes so many impressions. It takes so much time for an author to be able to sell a book simply because their name is on it.

There was a case study of an author who I think everyone would be truly shocked to learn that after having an amazing, award-winning, bestselling book for years and years, their next book, which was released shortly after the bestseller, sold only a fraction of the copies because no one remembers the author’s name.

It’s really tough. Publishers aren’t helping because they don’t necessarily feel responsible for building the author’s platform or brand recognition.

Why don’t publishers help authors build a brand?

Thomas: It’s interesting because publishers have a disincentive to do that.

Let’s say I’m a publisher, and I want to sign Jane Friedman as an author. The more famous Jane Freedman is, the more I have to pay to sign her. And the more famous I make you, the more expensive you will become for the next book. As your fame grows, I may not be able to afford you anymore.

As a result, you take your big platform to my competitor and publish your next book with my competitor. All that money I spent building you up is now helping my competitor. It’s not helping me. That is a powerful disincentive for publishing companies I consult with.

I advise publishing companies to make their name mean something.

Random House is really at a disadvantage in that regard because their whole founding ethos was that they just picked random books that they thought were winners on an individual book basis. The name Random House doesn’t mean anything. It doesn’t tell you what kind of books they publish. It just tells you the editorial board thought the book was good.

If a publisher can make their name mean something, attach it to a genre, and build relationships with readers, they will be more effective.

The only path forward is better branding.

Readers need to know what the logo on the spine means. You see Tor Books doing this a little bit. You see Baen doing it better. Some romance imprints do it well.

The company that does it best is Wiley and Sons with the Dummies books. They’re able to pay half the royalty that their competitors pay, but authors are willing to sign because they know that Wiley and Sons can put that book in front of a lot of readers.

That ugly yellow cover will sell a lot of copies because they have a brand that means something, and authors want to be attached to a strong brand.

Jane: We talked about how Penguin Random House did not gain and probably lost market share. The other thing they looked at was the advances they were paying over that 10-year period. Obviously, it was important for the government to prove that the advances were declining. They focused on the top 2 % because the trial showed that for the other 98%, the advances stayed the same or increased a bit over that time period.

As Penguin Random House and other huge companies have become more risk-averse, and as they have become huge entities, it has opened a lot of room for smaller presses, independent presses, and self-publishing authors to have a meaningful role in the marketplace.

Thomas: The decline of the top 2% of author advances has me wondering if the decline was because neither of the Obamas nor any former president or first lady signed a book deal. The book advance for President Obama was around $80 million, and if you include that in your sample set and take an average rather than a median, then the advances for that time period will have shown a decline simply because there wasn’t an astronomical advance paid in subsequent years.

Something similar happened in the music industry. In 2015, there was a lot of buzz in the entertainment news that CD sales were up, and everyone thought that CDs were coming back.

But if you investigated the numbers, you could see that Adele sold so many CDs that she single-handedly moved CD sales in a positive direction. It wasn’t that CDs as a category were doing well; it was that Adele specifically was doing well.

Jane: More recently, Colleen Hoover has had the power to lift Simon & Schuster’s fortunes. She publishes with several houses, but Simon & Schuster is the particularly lucky recipient of some of her works that have been released in the last few years.

As a result, Simon & Schuster was doing great up until this last quarter when Colleen Hoover’s sales were down.

That’s another thing that the trial helped demonstrate clearly. The industry depends on having these blockbusters to keep things moving. They also need books that are going to backlist well because those backlist sales keep things going forward.

Thomas: Books that backlist well are books that have evergreen sales. The typical novel has a big sales surge upon release and gets most of its sales in the first 30-60 days. Those initial sales make a big curve, and then there is a long decline where the book sells fewer copies than the day before unless there’s a BookBub deal to boost sales.

But some books just keep selling year after year and sometimes decade after decade.

I can’t tell you how many times I’ve purchased the Chronicles of Narnia. The publisher isn’t spending any money on making new Chronicles of Narnia books. They’re just making a profit from a dead author’s books that are still popular.

Evergreen backlist sales like that fund a lot of publishing. They’re more predictable than new book sales. Publishers don’t have the expense of paying an advance or an editor. They just pay for printing, and the profit margins on printing are high.

Jane: One analyst, Kathleen Schmidt, who has worked at most of the Big Five and is now a publicist, kept reiterating that the big publishers have an advantage because they have these backlists. Those backlist sales give publishers the leeway to take more risks because they have that that money coming in.

Thomas: Most books are sold and published outside of the Big Five. It’s not like Hollywood, where the top five studios make most of the movies.

It’s not that way in publishing because the cost of starting your own publishing house is so much lower. If a small house figures things out and gets a couple of hits, suddenly, it becomes a medium-sized house. Companies like Scholastic should be in the Big Five conversation but aren’t.

If you’re not picked up by a Big Five house, it doesn’t mean you won’t be successful or that you won’t sell copies.

I’ve interviewed indie authors on this show who have sold over a million copies as indie authors. If I could choose to sell a million copies with a Big Five publisher or on my own as an indie, I’d choose to do it on my own because indie authors get to keep 70% of the sales money.

That’s encouraging for most authors who know that the Big Five isn’t in their future. Authors finally realize, “I don’t need the Big Five. They don’t determine whether I’m good or whether I’m successful. Even if they did pick me, that wouldn’t make me successful because I may only sell twelve copies.”

Jane: This trial focused on a particular kind of publishing. It didn’t look at the vast universe of publishers. It really focused on the Big Five and a few small outlying companies.

They were only concerned with the publishers that were competing for the million-dollar books, and that’s a very particular type of author. It’s the Obamas a handful of debut authors.

Any final tips or encouragement?

Jane: Publish in a way that suits your goals and try to avoid the lure of prestige or status that comes with a big advance.

Want to keep up with what’s going on in publishing? I highly recommend Jane’s Hot Sheet newsletter. It’s a great summary of what’s going on in publishing.

It covers the Big Five as well as the mid-market and indie market. She even works with Alex from k-lytics to cover the real numbers from the ebook market, which you don’t really get anywhere else.

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