Restructuring Royalties

Dear Authors,

It feels like yesterday that Inkshares was just this — an idea on a whiteboard.

November 2013

Now I see our books in bookstores. I negotiate their licensing to audiobook publishers and foreign publishers. I sit with the studio heads and production-company executives who want to turn them into TV shows and films. I look at my phone and see Tweets like this:

All of this in a bit more than two-and-a-half years (and a lot of grey hair). That begets the obvious question: where we do we want to be two-and-a-half years from now?

I want to talk with you about my three goals right now in leading Inkshares along with Thad.

Goal 1:

Talk to and learn from our authors

First, we wanted to open a dialogue with you, our authors, about how you view Inkshares. The survey was a highly informative start, and we had a great time on the Google Hangout. We followed up with another survey on the community — how you view it and how you think we can grow it — that was also edifying.

Here’s a high-level recap of what we learned about how you view us in terms of publishing and royalties.

  • 70% view us as a traditional publisher rather than a self-publisher.
  • 90% would trade royalties for more services.
  • 90% listed either “total number of books sold” or “marketing and distribution” as the single most important thing as an author.
  • Per-book royalty was clearly at the bottom of the importance pile, with the fewest folks putting it as “most important” (7%) and the most people putting it as “least important” (33%).

This was important to hear as Goal 3, discussed below, is restructuring how we share royalties.

We also learned some great stuff about how you view us in terms of a community.

  • Roughly as many of you see the community as much like “high school” as a “family.”
How you view the community.

This is important for us to hear and coincides with a lot of internal concerns that we’ve had about incipient cliquishness.

Goal 2:

Articulate our vision of where we’re going

Second, we wanted to articulate our vision of Inkshares. I was lucky enough to discuss this on the Write Brain podcast last week and will be sharing more details in the next two weeks. Broad strokes, we want Inkshares to be the publishing centerpiece of a verticalized entertainment company that scales the stories in our books into all formats — whether licensing into audio or foreign, or adapting into TV and film. We’ve already begun this verticalization with Filip Syta’s The Show, Mike Mongo’s The Astronaut Instruction Manual, and most recently strong interest in J.F. Dubeau’s second book, A God in the Shed. We’ll be sharing this vision with you in more detail soon.

Jokes aside, this GIF is from Outlander, a STARZ show based on the eponymous historical-fantasy book (series) by Diana Gabaldon. The new Legendary Digital fantasy contest starts today on Inkshares and could produce the next Outlander.

Goal 3:

Restructure royalties to make Inkshares more sustainable

Third, we wanted to restructure how we share royalties. We founded Inkshares two-and-a-half years ago with a basic goal: leverage the intelligence and financing of crowdfunding to build a more efficient publishing model to fill the gap between self-publishing and traditional publishing. We’ve established not only a great community but also a strong brand as a full-resource, full-distribution publisher. However, while the crowd dynamics of our platform have provided a great source of curated content, we’ve found that we still have to cover a large share of production costs ourselves. This necessitates that we change how we share book revenues with our authors. I want to: (1) walk through how we share revenues now and why it’s not sustainable, and (2) explain the new system and why we think it represents a fair split.

An actual picture of our accounting operation. No, not actually.

For simplicity, I’m going to assume an “average sale” amount of $10, which makes the math easy and is pretty close to our actual average sale amount ($10.99). I’m also going to focus on print books sold to a book retailer as that’s most of the market. The old model gave authors 50% of gross revenue on print so we immediately gave $5 to you, the author. We then paid $2.00 to Ingram in distribution and storage fees, netting us $3.50. With a print cost on that blended unit of $2.50-$3.00, Inkshares was making about 50 cents to one dollar per copy (averaging about 79 cents).

If we made books at no cost to Inkshares that would still be a weak revenue model, but it is even tougher because we contribute on average $15,000 to $20,000 in putting the first run of a book into market. Each book would need to sell on average 20,000 to 40,000 copies just for us to break even. As authors, you certainly know how rare those types of sales figures are.

We focused on four options. First, we mapped out what a “production advance” might look like. When there is a gap between dollars raised and the cost of production, then that could be dealt with as a “production advance” that would be recouped ahead of sharing money with the author, just like a normal advance would be by a traditional publisher. Second, we looked at moving from sharing “gross revenue” to “net profits.” This would allow us to net out distribution fees, payment processing fees, print costs, and any shipping or fulfillment costs. Fewer than 1 in 5 of you were against profit-sharing. Third, we could change the actual percentages, moving from a 50–50 split to something sustainable for us. Fourth, we analyzed moving our payment schedule from weekly to quarterly to ease some of the cash flow concerns inherent in publishing.

Our high level thoughts on this were: that we would like to avoid the “production advance” if possible; that profit-sharing or a “net receipts” model would not only be the most fair, but also offer the most transparency and be easiest to understand; and that we’d like to still aim to pay authors at least twice what they would get from a traditional publisher. I am pleased to say that after an intense week of financial modeling we have achieved that goal.

Thad and I have been doing a lot of this lately.

You might find this interesting, but when I wrote our first publishing contracts (on a plane to AWP in February of 2014) I wrote nearly exactly what we present below. (We ended up changing to a revenue rather than profit share after Jeremy succeeded Larry as CEO that May.)

Working on our first publishing contract on the way to AWP in 2014.

The new structure is a 65%-35% Inkshares-author split of net receipts payable quarterly.

Rather than dividing up your and Inkshares’ portions based on top-line revenue, we would first deduct certain costs and arrive at a “profit” figure which we could then share. On an order on, we would deduct shipping and packaging fees, payment processing, and print-unit costs. On wholesale orders, we’d deduct the distribution fee, payment processing, and print-unit costs. Of course, ebooks would have no deduction for print costs. Collections will be capped at 10% and that will be deducted prior to the split. What’s left over is what we share, flowing to you as royalties and to us as the income that we use to pay our overhead and invest in building Inkshares. On an average sale, this split would give Inkshares about $4 per unit and you about $2.20. Importantly, this would set up Inkshares to nearly break even on a book if it sells through its first average print run net of copies sent to backers (3,000 units) and still pay authors on average more than double what they get from a traditional publisher. We’ve always valued transparency with our authors and accordingly wanted to share our actual calculations so you could see what this would look like as based on actual data on Inkshares’ sales to date. Depending on the price point for the book and whether it is sold wholesale or retail, these numbers might be slightly higher or lower for specific titles in various formats. (In addition, any credits that are used to purchase books after the pre-order stage will be deducted–though I think there is a good chance we will stop credits from being applicable to funded books very soon.)

Average Inkshares per-title breakdown blended across format (print and digital) and sales (retail and wholesale).

Your royalty statements will show you how these costs break down in a detailed and transparent manner and the new royalties dashboard will be deployed next week. The next quarterly payment date is October 1st.

Most importantly, this allows us to keep investing our money in helping to make your books the best they can be rather than the best they can be based on the amount of money raised during crowdfunding. It will also create a “real” revenue stream for Inkshares that allows us to build out core capacities and print larger runs with greater confidence. It will solidify Inkshares and with it the best chance for success of both present and prospective authors.

If you are an author and the evolution of the Inkshares model is no longer a fit, that’s okay, too. Email me personally and we will work out an exit strategy that works for you (refunding backers if in process, or giving back our publishing rights if already published). For those of you opting in, which I understand to be most of you, we’ll reach out with an opt-in mechanism soon.

With respect to our ongoing conversation with the community, I also want to take this opportunity to announce that Angela Melamud will in addition to marketing now be wearing the second hat of Community Manager. We’ve given her explicit direction to triangulate between Robocop and cult leader with just a little bit of “that cool Aunt who told your parents she was taking you to a Raffi concert but actually took you to a Slayer concert.”

Yes, exactly like this.

I’m looking forward to speaking with each of you soon.