Data Guy on the Author Earnings Methodology July 28, 2014 by Hugh Howey A great exchange over at The Passive Voice. William Ockham, one of the great thinkers on all things publishing, put forward two of the criticisms he’s seen of the AE data. Data Guy chimes in with a third problem, and explains how all three criticisms do not alter the conclusions drawn from our reports. When people point to the vapid and non-existent but supposed “refutations” of our data, this might be a good link to rebut with. I do apologize to those whom this information proves troubling, but it is a fair view of what is happening in the world of ebooks today. And all the trends we’ve seen point in the same direction. William OckhamJuly 27, 2014 at 6:44 pm I have seen a couple of interesting criticisms of the AE reports. The first is that Big 5 authors get substantially more in advances than the standard royalty rates would suggest (40% of gross was one figure mentioned). Assume for a minute that contention is true. Now take a look at the data from AE on the percentage of Big 5 earnings from titles originally published before 2011. Those are books that have definitely earned out. Create a model from the AE data that makes that 40% figure work. Publishing looks like a very strange business indeed. Spoiler alert! I suspect that that 40% of gross comes from looking at the first year income of a publishers’ titles. The Big 5 has always had what KKR calls the “produce model” of selling books. The other criticism of the AE data is that the Big 5 is getting more than the Amazon retail price for many of their best sellers (i.e. Amazon is selling at a loss). This could skew the numbers somewhat. If this is indeed a big issue, there is a simple way for those publisher insiders (looking at you Jeremy Greenfield) to prove this. Replicate the AE approach, but pull the amount you believe the publisher is receiving. If that is beyond your technical ability, I would be happy to do it for you. For my standard overtime rates, $250/hour. Data GuyJuly 27, 2014 at 11:42 pm William, I’ll play devil’s advocate and add one more semi-”valid” criticism to the two you mention. While our sales to rank curve has proven to be highly accurate at predicting daily sales for ranks all the way up to the top 2 or 3 books, and even for those top 2 or 3 it will be quite accurate *on average*, the actual sales of the very top 2 or 3 books might vary significantly from day to day — from 5,000 to 10,000 or rarely even higher. But it’s important to keep in mind that Amazon sells more than 1,500,000 ebooks a day (just integrate the area under the rank-to-sales curve to calculate that). Even if we happen to capture our sample on the day when the movie version of The Fault In Our Stars or Allegiant hits the theaters and sales of that #1 book spike to something wild like 20,000 units, it would end up making less than a 1% difference in any of the AE pie charts. Let’s look at the other two criticisms you mention, which are the only other two I’ve found interesting as well. The observation that Amazon pays traditional publishers based on a wholesale reduction of list, but sells those books at a substantial discount from list, is a valid one… and in fact, we built that assumption into our spreadsheets and pie charts. We modeled Amazon’s effective retailer cut as only 20% for traditionally-published books. In reality, some books will be discounted deeper, and some will be sold at full list, but an average of 20% felt about right. But if you want to try out different Amazon retailer-cut percentages in our spreadsheet, you can — just change the number highlighted in yellow and the graphs will update. Just for fun, when Hugh & I were discussing what number we should use for Amazon’s effective retail cut on sales of traditionally-published books, I plugged in 0% to see what would happen. Even under such a extreme, non-credible reductio ad absurdum scenario (which would mean that Amazon is in total losing money across *all* sales of traditionally-published books), the Indie share of Amazon ebook author earnings was still 34% compared to the Big-5′s 41%. The other valid criticism you mentioned is based on the observation that some traditionally-published authors receive advances that don’t ever earn out, thus they are effectively receiving higher-than-25% net royalty rates and our spreadsheets and pie charts don’t capture that. While technically true, it’s also largely irrelevant, because those “extra” dollars — even if they add up to a significant total — only end up going to a tiny handful of authors at the very top of traditional-publishing’s pay scale. The payments these few megabestseller authors are receiving aren’t really “advances against royalties” in the true sense at all. These few authors have effectively negotiated the receipt of huge lump-sum payments for their books, instead of whatever nominal royalty rates are specified in their contracts (to avoid triggering escalator clauses). For the other 99.9% of traditionally-published authors, advances are no more than a loan made against their own future royalties. Thus those advances have zero net effect on our pie charts. Our Author Earnings charts say “Daily $ Revenue to Authors” because that’s what actually matters to 99.9% of traditionally-published authors, regardless of whether those daily earnings are still paying down the advance and bringing that first royalty check closer, or the advance has already been paid off and those earnings will be reflected on the author’s next royalty check directly.