discussion week 2

IN BUSINESS

MANAGING RISK IN THE BOOK PUBLISHING INDUSTRY

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Greenleaf Book Group is a book publishing company in Austin, Texas, that attracts authors who are willing to pay publishing costs and forgo up-front advances in exchange for a larger royalty rate on each book sold. For example, assume a typical publisher prints 10,000 copies of a new book that it sells for $12.50 per unit. The publisher pays the author an advance of $20,000 to write the book and then incurs $60,000 of expenses to market, print, and edit the book. The publisher also pays the author a 20% royalty (or $2.50 per unit) on each book sold above 8,000 units. In this scenario, the publisher must sell 6,400 books to break even (= $80,000 in fixed costs ÷ $12.50 per unit). If all 10,000 copies are sold, the author earns $25,000 (= $20,000 advance + 2,000 copies × $2.50) and the publisher earns $40,000 (= $125,000 – $60,000 – $20,000 × $5,000).

Greenleaf alters the financial arrangement described above by requiring the author to assume the risk of poor sales. It pays the author a 70% royalty on all units sold (or $8.75 per unit), but the author forgoes the $20,000 advance and pays Greenleaf $60,000 to market, print, and edit the book. If the book flops, the author fails to recover her production costs. If all 10,000 units are sold, the author earns $27,500 (= $10,000 units × $8.75 – $60,000) and Greenleaf earns $37,500 (= 10,000 units × ($12.50 – $8.75)).