Booksquare

Longtime BS BS readers know that one of the dirty little secrets of the publishing industry relates to “club” sales. According to the New York Times, five Regnery authors are suing the publisher for lost royalties due to in-house/related party club sales and other deep discount related party transactions.

The book club is a simple, direct sales tools employed by publishers. Let the books come to the customer, the industry reasons, why make the customer do any work? These clubs were also popular in the music biz, you’ll recall from the time you were six and completed a form to receive ten free records, not realizing that you’d committed yourself to a lifetime of falling behind the eight ball when it came to preventing the shipment (and associated payment) of the next club selection and thereby ruining your future credit and preventing you from becoming the President of the United States.

Or so I’ve heard.

The Regnery authors who are suing are doing so because they have determined that the club sales made to readers unfairly penalized them. Some of you want to cluck your tongues and note that this is not a new thing, the contract is pretty clear, and they should have known this is how the cookie crumbles. Others, of course, are gleeful. Finally, you think, someone is talking about this huge loophole.

The problem with these club sales is two-fold. First, of course, is that there is (generally) no payment associated with the “free” books. The reasoning on the side of the publishers is “no money received, no money to pay”. The second is that the royalties associated with club sales are substantially less than those for traditional sales. Publishers like the UK’s Mills & Boon, who taught the game to Harlequin, built huge fan bases on direct sales. To this day, Harlequin pushes its clubs via advertising and throughout the eHarlequin website.

Oh wait, three-fold. Perhaps the most egregious problem comes when the club is a member of the publisher’s corporate family. Now, we all now that corporate family trees can be very complex. Contractually defined parties can ensure that Entity A has no relationship to Entity B because Entity A signed the contract while Entity B lives on another branch. Oh sure, they consolidate up for tax purposes, but that’s the extent of the relationship.

Without knowing the specific language in the contracts signed by these authors, I can only surmise that the suit revolves around a clause that reads something to the effect of “sums actually received by Regnery”. In this case, the money is actually paid to whatever corporate entity nurtures the book club. That entity reports its results to Regnery who in turn reports to and pays the author. Thus Regnery only pays on what it “receives” from the club entity.

The NYT article notes this amount is 10% of Regnery receives. In the case of the free books that clubs give away like candy to entice new members, 10% of free is nothing. In other cases, it is more difficult to determine the sums because the in-house club “buys” the books at a deep discount from Regnery and then reports back on the results. I have no way of knowing the basis for the payment from one entity to another (it could be a flat per unit amount or a sliding scale based on varying criteria or other). The authors assert that the amounts received for these sales are substantially lower than what they would get via traditional venues, and my experience with other club transactions supports this assertion.

These policies come from a simpler time and place. They reflect the realities of a market that frequently involved true arms’ length deals between unrelated third parties. They also reflect historical economic factors. The business of direct distribution has changed and changed again since then, yet authors remain stuck with contractual terms that have not evolved with the times.

Obtaining and retaining club members is an expensive proposition for publishers. The cost is worth it if a long-term club relationship is established. Smart consumers, of course, take their free books and cancel immediately. The instances of bad debt are much higher for clubs than for other sales venues (major bankruptcies notwithstanding) due to people who simply don’t pay for the books shipped. Collection costs, too, are higher.

Still, publishers have determined that the ongoing, direct relationship with these customers makes these costs worthwhile.

However, when the contracting parties are part of the same parent, serious questions arise. Are the negotiations between the two entities truly conducted in a fair manner? Are the prices paid representative of market value? Are there behind-the-scenes transactions that push money from one ledger to another? Are these related-party transactions done to benefit corporate interests at the peril of authors?

The Regnery authors are taking a bold step with this lawsuit and have the potential to affect change throughout the industry. I think it’s about time.