What are O'Reilly's views on proper uses for reserve accounts? Recently, a company that shall remain nameless sent letters to its authors stating they were to get 20 percent on all monies owed, including reserve accounts.
My take on this is that the reserve accounts are monies held in reserve by the publisher so that the author is covering returns of books. As such, this places them in an implied escrow status.
The company has essentially embezzeled money they held in trust for their authors. What are your feelings and, more importantly, what's O'Reilly's policy on reserve accounts?
Hi Mike,
Let me first try to explain why publishers institute royalty reserve policies. In most cases, books sold to a retailer are 100 percent returnable. (Occasionally, a publisher makes a non-returnable sale for a large quantity of books with a significant discount. This situation is the exception rather than the rule.) In a perfect world, bookstore buyers purchase exactly the number of books they will in turn sell to customers.
Unfortunately, we don't live a in a perfect world. Book sellers and publishers use their knowledge and educated guesses to purchase an optimum number of each book. In most cases, sales are usually higher or lower than anticipated, and for a handful of books those variances are significant. Even with diligent replenishment (the reordering of books after the initial purchase), additional issues can pop up, such as a new version of the covered software is released, a competitor produces a better title, superior technologies appear on the scene, or a new edition of the book is released, causing further wrinkles with everyone's attempts to keep the books stocked at a perfect level.
Publishers also prefer to see extra titles on the shelf. If readers want to purchase a book on, say, Enterprise Java, and they don't see a particular publisher's title, they may select another publisher's title. If you don't have a book on the shelf for the customer to see, they can't buy it. Hence, more books are usually shipped to resellers than are sold, requiring books to be returned.
When retailers return books to a publisher, they receive full purchase-price credit. Because the cycle of purchasing, returning, crediting, and paying royalties stretches out over many months, the author has usually received a royalty payment for a book that eventually is returned to the publisher. Therefore, in many instances, publishers place a clause in their contracts informing the author that a reserve account will be held on the sales of their books. A reserve account isn't established without the knowledge and consent (through an executed contract) of the author.
Publishers historically receive 20 to 30 percent of their books back from retailers, though the range can be from single-digit percentages to over 50 percent. In our experience, publishers hold about 20 to 25 percent of sales in the reserve account, and over the lifetime of a book, this amount will be necessary to cover the actual returns in almost all cases. In many situations, the amount held does not cover the cost of the actual returns. A publisher finds it easier to hold a reserve rather than ask an author for the money back after it's been paid. On the other hand, an author of a successful, long-living book can have a portion of their reserve held for several months, if not years. Contracts vary, but after a certain period of time, authors can request the money left in their reserve accounts. Holding a royalty reserve is by and large a fair system due to the fact that the author gets exactly (and sometimes more than) what he or she has earned.
At O'Reilly & Associates, we do not normally hold a royalty reserve. We also don't have a royalty reserve clause in our author agreement. We are very deliberate (well, as deliberate as we can be; we're not flawless) in our choice of topics and authors. When we publish a book, we fully expect to keep it in print as long as the product or technology remains viable. We don't throw multiple competing titles on the same subject into the market hoping that one might survive to see a second edition. We publish to win, and work to keep our titles competitive as long as demand for their content continues. Such a strategy gives us the opportunity to forgo holding royalty reserve accounts for our authors.
We may, from time to time and on a case-by-case basis, negotiate a reserve with an author, based on the belief that more titles have sold in than will eventually sell through. This is often the case when a book has a lot of initial sales momentum. You want to ride the horse as far as it will go, and so do retailers, but eventually you find the point where the market won't accept any more.
This may also come up with a title that follows on the heels of a huge bestseller. For example, in the early 1990s, when The Whole Internet User's Guide and Catalog was selling 20,000 copies a month, our next Internet title, Managing Internet Information Services, had a huge sell-in (on the order of 60,000 copies) because retailers got over-excited. The downside of a situation like this is that if a book is overbought, it will eventually be returned, and then the sales picture is even bleaker than if the book had sold in more moderately.
As I've often noted, a book that sells in two copies and sells through is considered a success and is reordered, but a book that sells in ten and sells through three is a failure, gets returned, and is not reordered. Not necessarily rational, but alas, too true. And in a case where a book is overbought, the publisher can be out on a limb without a return reserve. Since so many publishers rely on a "push" model of sales, in which most of their books are oversold, a returns reserve makes sense. At O'Reilly, we try to sell in conservatively so a book will have a long lifetime, but even so, we don't always get it right.
That being said, I do think that some publishers abuse return reserves and never pay out the reserves to the author, even if the books do sell. So this is an area that authors definitely ought to pay attention to. An author should almost certainly try to recoup any outstanding return reserves being held more than a year after the book has stopped seeing significant sales, since that will allow enough time for retailers to return most of the stock that they aren't going to sell. (However, despite policies that say returns must occur within a given time limit, especially a time limit after a book has been taken out of print, we still get returns of books that are many years out of print.)
Laurie Petrycki and Tim O'Reilly
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