Revamping the Publishing Financial Model

The New Yorker has a fascinating item on Net Minds, a project allowing authors and editors to find each other for self-publishing books.  Odesk and Elance do similar things, providing a platform for freelancers and task owners to connect to do things.  The difference with Net Minds is the funding mechanism, which is equity rather than cash – editors find writers and vice versa and sign an equity agreement for the book.  Services are gratis, in exchange for a portion of the revenue.  The New Yorker is dismissive, which of course it is.  Personally, I’m extremely curious.

Traditional publishers are a lot like highly-involved VCs, except they give out a debt-equity mix.  They give you an advance of $X (debt), and take a claim on future earnings (equity).  The debt finance limits their downside by giving them a first claim on $X of revenue, and the equity gives them unlimited upside.  Like a good VC, they use their professional skills and excellent network to do their best to help you succeed.  And like all VCs, they are portfolio players that rely on small investments widely spread.  Most investments cost little money and return little or nothing, and a rare few return many times their value.

A good deal for a financier generally means a bad deal for the financed, and publishing is no exception.  After earning back the advance, a writer will earn around 10-20% of the listed sale price of the book.  Without a publisher, they’ll earn whatever is left after the sales channel takes a cut.  Amazon and Apple pay out 70%.   That’s a pretty huge difference – even taking into account the lower price point on an ebook.

  Traditional (Hardcover) Self-Published
Price Point $20 $9.99
Author’s Cut 15% 70%
Author Revenue Per Sale $3.00 $6.99


Not to mention the debt financing component!  If a writer get a $10K advance, they need to sell over 500 copies before they see a dime.  500 copies self-published is only $3495 to the writer, so the published guys are still ahead.  But they lose ground really quickly – if the self-publishers can manage to move 2,000 copies everything from there on out is gravy.  Since I am a nerd, I made a graph.

 Author Reve

Now, it’s pretty difficult to sell 2,000 copies without a publisher behind you.  And there’s the rub, that publishers contribute valuable services like editing and publicity and sales channels.  They’re not screwing you out of money from malice, just overcharging you for genuinely valuable services.  They can do this because they have a dual role in providing services and debt financing.  And the terms of their debt finance are horrible.   It’s convertible debt!  [AC1] Once you clear the debt obligation it converts into equity in your venture at a cripplingly high rate.  This is the sort of thing that is extended to distressed borrowers, not healthy ones with incredible potential.

I suspect most writers are a lot like most entrepreneurs – possessed with boundless visions of their potential success.  If you are an aspiring writer with this vision, you should do everything possible to give away as little equity as possible.  Publishers provide you with genuinely valuable services for the reasons Charles Stross outlines. But if you can deliver a book with a minimum of capital investment (e.g., by having a day job rather than writing full-time), you should do everything you can to avoid the debt finance because you pay for it with losing most of your equity.  It’s a basic axiom of debt finance that anyone who needs the money pays out the nose for it!

So here’s my pitch – the equity-only publisher.  Take a few million dollars, go to New York, and poach the best publishing talent you can find.  The well-connected, the most-skilled, the cream of the crop. Definitely the ambitious ones. Give ‘em stock options Silicon-Valley-style.  They, in turn, go to the best and most highly branded authors that they can find, the ones who don’t need the advance to pay the bills.  Your guys promise them this: “We want your book.  We’ll pay you an advance of $0.  But we won’t screw you on the earn-out or any of this 15% royalties bull.  We split it down the middle. You know it’ll sell, and we will make sure it sells every copy it can.  You’re well-off.  Let’s make you rich as all get out.”

Maybe that idea is wacky!  But I think you’d find more than one author willing to give it a shot.


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