05 June 2014

Cordelia's Promise

Good my lord,
You have begot me, bred me, loved me: I
Return those duties back as are right fit,
Obey you, love you, and most honour you.
Why have my sisters husbands, if they say
They love you all? Haply, when I shall wed,
That lord whose hand must take my plight shall carry
Half my love with him, half my care and duty:
Sure, I shall never marry like my sisters,
To love my father all.

King Lear, Act I sc. 1 (Cordelia). How like the Bard of Avon to explain for us the stakes in AmazonFail 5.04 (the current dispute over terms between Amazon and Hachette) in terms so much clearer, so much less ambiguous, so much more sensitive to the consequences, than anything appearing in what passes for the "publishing press" or most commentaries. In the end, the kingdom will be ripped asunder, there will be civil war, and the king will die bereft. (But that's pretty much a given no matter what Cordelia does.)

So, instead, let's talk about publishing contracts for a moment, and then intervene with a sea story (that is also about publishing contracts in its way). Trust me, it will come back to Cordelia's promise (threat?) with disturbing precision.

Most of the grousing about authors' earnings concerns the base rates imposed upon them1 by commercial publishers. The authors gripe about "25% of net" for e-books, and rightly so. They gripe a little less loudly about 10%/12.5%/15% on hardcover trade fiction as a base royalty rate. They gripe loudly about advances, if seldom with numeric disclosures attached.2 What they neglect, however, is the high-discount clause: In almost all commercial publishing contracts, the author's per-copy compensation is cut in half for copies sold at a high discount (but not "remaindered", for which the author receives nothing). Consider, for example, an author at top escalator (that is, 15% per copy) for a hardcover novel — not a bestseller, but a steady-selling work of general fiction happily ensconced on the midlist for half a decade now that long ago earned back its advance — currently retailing at $25.95.3 For the royalty period ending on December 31, 2012, the royalty statement showed that there were 1,227 US sales of that edition. (Plus sales of other editions, but let's concentrate on this line item for a moment.) Calculator in hand, the author figures that she should have been credited with 1,227 * $25.95 * 15% = $4,776.10 in royalties. That's not what the royalty statement says, though; instead, it accounts for those sales like this:

227 ISBNxxxxx $883.59  
1000 ISBNxxxxx $1946.25  
1227 ISBNxxxxx TOTAL: $2829.84

for an on-its-face and in-your-face detriment to the author of $1,946.26. This particular author is no shrinking violet, so she (there's no agent on this book any more, as the agency went into bankruptcy and everything got returned) called the royalty department in New York. After five calls, she finally reached someone who knew: That second line was a single bulk order from Amazon... at a discount of 0.5% over the trigger for the high-discount clause.

That was bad enough, and sent the author shrieking for assistance. At which point the following math comes into play that demonstrates the real problem here:

Discount Gross
45% $14.27 $3.89 $10.38
50.5% $12.85 $1.95 $10.90

That's right: The publisher's per-copy net is five percent higher if it accepts a five-percent-lower gross from Amazon.4

And now for something completely different that turns out to be completely the same: A sea story. Once upon a time, in the merrie olde land of England, a buyer and a seller wanted to make a deal on cotton from India. They agreed upon a price, a place of delivery, the quantity and quality of the goods, and the means of delivery: The ship Peerless, sailing from Bombay to Liverpool. Naturally enough, a lawsuit arose... because it turns out that there were (at least) two ships named Peerless sailing from Bombay to Liverpool. Within two months of each other. Both manifested to carry quantities of cotton of that grade. The buyer naturally got rather upset when the seller didn't deliver from the first of the two Peerlesses, and refused to accept "late" delivery from the second one.5 The representations made to the court were that the buyer thought Peerless referred to the earlier-sailing vessel at the time the contract was made, while the seller thought Peerless referred to the later-sailing vessel at the time the contract was made. There was therefore a mutual mistake of fact, meaning that the contract was voidable and the defendant/buyer could not be forced to pay for or accept delivery of the cotton. Every law student in the English-speaking world has read at least a summary of this case, and probably the whole thing, in his or her basic Contracts class; it is considered the "definitive" example of "mutual mistake of fact means the contract is voidable."

Why am I telling a sea story in the midst of publishing? Well, I suppose I could argue that increased use of overseas printers makes it relevant; but that's not my point. My point is that the trigger levels for the high discount clauses in most publishing contracts were set without claimed knowledge that there was — or, more to the point, might be during the foreseeable life of the contract — a distribution system different from the publisher-distributor-bookstore-with-discounts-and-returns default of the time. Does that make our author's circumstance above a mutual mistake, and that clause at least voidable? I'm afraid not.

It's worse.

Digging into the depths of maritime history discloses that during the few years surrounding that particular sailing of that particular (or those particular) Peerless, there were a dozen or more other commercial vessels calling at UK ports with that name, almost all calling England "home." As the case itself indicates, more than one called regularly at Liverpool; more than one regularly carried cotton and other bulk goods; more than one sailed to and from India; and, crucially, the bill of lading-equivalent does not appear to have required a direct voyage, so that cargo of cotton from Bombay might have included vanilla beans picked up at a midvoyage stop in Madagascar. <SARCASM> Fortunately, it wouldn't have included slaves because the slave trade had been made unlawful on English vessels by that time. </SARCASM> All of this information would have been readily available to a sophisticated buyer, or seller, who actually did even basic research on the meaning of the terms embedded in his contract. In short, the court should have realized it was dealing with two ignorant twits. But then, commercial contracts between ignorant twits get enforced all the time... especially when one or both of them lie to the court about the depths (and nature) of his/her/their respective ignorance.

That, however, is distinct from our author's situation; in our author's situation, the publisher clearly already knew. At the time that contract was negotiated and signed, that publisher was already making deals on terms not disclosed to the public with "big box" vendors like Wal-Mart/Sam's Club and Costco.6 Later audits have disclosed that those terms, for large orders, also fell into high-discount territory. In short, that publisher knew before negotiating that contract that the implied rarity of the high-discount-clause term was deceptive, and reflected a probable change in future market conditions and structure. The author (and now-deceased agent), however, did not have that information, and was in fact deceived. Bluntly, this is not an instance of mutual mistake allowing voidability; it is an instance — a pattern and practice — of deceptive conduct by one party to a series of relatively-but-not-entirely-standardized contracts. But since this is a business-to-business transaction, the law presumes that both parties are highly sophisticated, have full access to all relevant information, and are fundamentally incapable of being deceived short of criminal intent to defraud. Our author is therefore out two grand unless a smoking gun surfaces showing that intent... or the publishers start throwing people on the stand who are as credible as the publisher witnesses in Wormyfruit. And that's for a particularly clear contract; I've seen parallel situations with much murkier/more-ambiguous contract language. Naturally enough, the publisher bluster is usually much louder in those circumstances.

And so we return to Cordelia. She's going to get screwed by that other half: Overwhelmingly, 50% is the trigger point for "high discount." Goneril and Regan will destroy the nation in their selfish attempts to gain market share political primacy, and it will be first at Cordelia's expense. Of course, her father is a foolish old man who has failed to look beyond his own borders for at least a decade — not least by encouraging those other two daughters of his to marry into the influence of foreign powers — and cannot conceive of anyone acting on a self-interest inconsistent with his (because he is, after all, the King). Poor Tom's a-cold.

  1. Not negotiated; in practice, if not in law, the rates themselves are non-negotiable, which leads to interesting questions about restraint of trade and unlawful pricefixing that have unfortunately been foreclosed in the US by centuries of contract law and a half-century of ever-restricting antitrust inquiry. There might be a handful — and I literally mean "a handful, as in 'I can hold the total annual set of contracts from New York commercial publishers comfortably in my hand'"... and I have small hands — of exceptions, but these exceptions do not actually prove the rule.
  2. An aside here about advances. Much of the publishing press, and many observers who should know better, treat this as a "loan" from the publisher to the author. It might be so characterized if the author was not providing something of value in advance of the advance. Instead, one must look at what the author provides: A license to use the author's intellectual property, often for an extended period of time under remarkably uniform terms. If this sounds a lot like buying a house or other piece of property over time, with a down payment that reduces the ultimate price (and can be forfeited if the property doesn't end up producing all of the benefits hoped for), it should: Economically, that's exactly what this is. It's only rhetorically that the content-distribution segment of the entertainment industry has managed to convince most — perhaps virtually all — commentators that it is dealing not in property, but in labor... and it's always been more respectable, indeed expected, that management will screw the workers!
  3. As the late Efrem Zimbalist used to tell us every week, "The numbers you are about to see are real. Only the names have been changed to protect the innocent... and even guilty bastards caught with the bloody knives in their hands laughing maniacally over the corpse proclaiming 'I did it! And I'm glad!' are presumed innocent before trial." And before you ask, the real statement also includes the two rounding errors in the publisher's favor.
  4. Not to mention the tax advantages from the lower facial valuation of its inventory; if the inventory is valued at 5.5% lower because that's the average actual selling price, that's 5.5% not subject to inventory value taxes any longer.

    Here, too, a short aside on e-books. The exact language in publishing contracts is still evolving, but there's a significant cohort of print-publication-contracts-that-also-included-e-books — both as negotiated from about 1997 through about 2009, and in retroactive "amendments" offered by major New York commercial publishers within even the last few months — that also sweep e-books into the high-discount clause. That's right: Even though the e-book rate is already based on net, if the net is too low the e-book royalty gets chopped in half, from 25% of that reduced net to 12.5% of that reduced net. This is almost impossible to police, though, because royalty statements do not disclose the discount or the number of copies sold for e-books from some vendors, including Amazon... because that's considered "proprietary" information between Amazon and the publisher.

  5. Raffles v. Wichelhaus, [1864] EWHC Exch J19.
  6. Irreverant, and possibly irrelevant, aside: I bought more than one gift copy of Harry Potter books at the local Sam's Club when Scholastic botched fulfillment for the lamented, local, excellent independent bookstore that has since gone out of business. When one is raising two voracious readers, one tends to be even more price-and-time-sensitive than the average consumer... not to mention that, as it turns out, these nonreturnable items in fact provided greater revenue to both the publisher and the author than the returnable items at the independent store would have. That, however, is a slightly different rant for another time.