Tuesday, February 10, 2015

The Ebook as Annuity

As a self-published author, your book is your asset.  It’s something of value you own and control.

Like the orange tree pictured at left that bears fruit year round, your ebook promises to yield you, your family and your heirs benefit for many years to come.

In this post, I’ll share a framework that might help you view the financial value of your books in a new light.  As I’ll present below, self-published ebooks share common characteristics with annuities.

In the old world of print publishing, a publisher would pay you a lump sum advance to acquire rights to your book.  If you were lucky, the book would sell well, earn out its advance and begin paying royalties on an ongoing basis.  Unfortunately, most traditionally published books go out of print before they sell enough to earn the author more than the initial advance.  Once the book is out of print, the potential royalty stream evaporates and that asset – the book – yields no additional income for the author unless the rights revert and the author republishes the book.

This means that prior to the advent of ebook self-publishing, for many traditionally published authors that first lump sum advance was all they earned from their book.

One reason traditionally published books went out of print so quickly and with such regularity is due to how print distribution and retailing works.  Brick and mortar book stores have limited shelf space.  Even though your local Barnes & Noble (or WH Smith or Indigo or name your local store) would love to carry millions of books on the showroom floor, the economics of unlimited inventory are simply impossible for physical stores.  Instead, physical stores are forced to limit their in-store inventory to books that sell well.  So if a book doesn't start selling well within a few weeks of hitting shelves, the store will return the book to the publisher (for a full refund) to make room for other, newer books.

As most authors can appreciate, a few weeks is not enough time for a book to find an audience, which means many high-quality print books are forced out of print too early.  Even if the book had the potential to sell continually, if those sales aren't high enough to justify continued shelf space, the books were returned to make room for better-selling books, and as books lost distribution they were forced out of print.

In the new world of ebook self-publishing, there are no advances, but your book never goes out of print either.  Thanks to the scalability and efficiency of online retailing, the digital bits and bytes that comprise your ebook can happily occupy an online retailer’s shelf forever if you let it.   Your book is immortal.  You always have another day to find your next readers.  You harvest your income over time as the book sells.

This life cycle of the immortal ebook changes the dynamics of how you can model and measure the income stream from your book.  In many ways, the income stream from an immortal ebook is more closely akin to an annuity, and specifically a variable annuity.

If you’re not familiar with annuities, here’s a quick introduction:  Annuities are financial investments usually sold by insurance companies, and often purchased by individuals for the purpose of retirement planning or income diversification.  The individual puts forth cash (an asset) to purchase the annuity, and then the insurance company in turn pools this cash with the cash from other investors and invests the money on your behalf in underlying assets that might include agricultural property, hotels, office buildings, bonds or any other bundle of income-producing investments.  The insurance company then promises to pay the individual a steady stream of income for many years, or for the rest of their life.  A fixed annuity pays a fixed monthly or annual amount.  A variable annuity pays a variable amount based on the performance of the underlying asset.

So this means your book, which is an asset you control 100%, shares some similarities with variable annuities with the exception that you (not the insurance company) control the asset, and you are the sole beneficiary of that asset’s performance over time.  Your book-as-an-annuity will very likely produce some level of income for you for the rest of your life.  All you need to do is keep the book in stores.

This variable annuity dynamic of self-published ebooks also changes how an author can measure the financial value of their asset.  For example, let’s say your book or your full catalog of books is earning you $200 a month, month after month.  What's the value of this income stream to you for the next five or 30 years?  Luckily, there are free calculators for this (click here for one such calculator).

To use the calculator, enter your expected monthly or annual income, and also enter an alternative interest rate. The interest rate can reflect a rate you’d be able to earn if you invested cash into some safe interest-bearing investment for the same period of time.  By entering the going interest rate, you’re better able to calculate the present value of your income stream.  In the example at left, I chose a 30-year period so I entered an interest rate of a 30 year US government bond, which today earns 2.58%.

In this example, a book that earns $200 a month for 30 years has a present value of just over $50,000.

Obviously, it’s impossible to predict future levels of income with precision. The longer the time frame you calculate, the greater the odds that your numbers are off by a significant margin. Your actual earnings might be higher or lower.  Nevertheless, this model for measuring the financial value of your asset is useful, especially if you’re approached by a publisher who offers you a lump sum amount of money (AKA an advance) to acquire your rights.  By analyzing the present value of the expected annuity stream of income, you’ll be better prepared to negotiate a fair price for your book, or you’ll have the confidence you need to reject the offer and walk away without regrets.

Here’s an even simpler, more practical example of annuity thinking:  A few months ago, a Smashwords author told me she was offered a contract for her book by a traditional publisher.  She rejected the offer because she realized that based on her current monthly sales, she'd earn more in the next three months self-publishing than she'd earn from the publisher's advance.

Ebook self-publishing changes the dynamics of the earnings stream for authors. Whereas most traditionally published print authors will earn the bulk of their book’s income from the advance, or from the first few month’s sales, self-published ebook authors are likely to earn the bulk of their income spread out over many months and years. This is especially true for fiction writers since great stories are evergreen.

When you run the numbers on your book as an annuity, even for shorter time frames of three to five years, you might discover your book is more financially successful than you realized.


Rebecca Cantrell said...

I, too, turned down a traditional publishing offer last year because the advance was less than what I was making on the book over a one year period, and I didn't want to trade my annuity for life plus 75 years (full copyright) for an amount I expect to earn this year, and next. I don't expect to be earning that amount in 30 years, but even doing those calculations in the short term can be very eye opening!

Joanna Penn said...

Thanks for posting this Mark. This is basically why I am such an evangelist for the indie business model - because you can be creative AND a business-person with this kind of attitude!

I did a video when the penny dropped for me around fiction not aging as well, it was a life-changing moment! When you understand how assets can be income-earners for years, and how one manuscript can be turned into multiple streams of income, it is pretty amazing.

Happy times!

Marsha Roberts said...

Great way to look at it, thanks Mark. I have two author friends who took the publishing deal offered. Not only do they still have to work as hard as the rest of us to market their books, but it's clear they won't be making more than the advance. I'll stay indie, thank you very much!

Anna Markland said...

So what is the best way to pass this treasure on to my heirs? Assign them copyright on my death?

Mark Coker said...

Anna, yes, authors should specify the disposition of their books in their wills and living trusts just as they would with any other valuable asset. You'll probably want to speak with your estate planner or attorney so everything's prepared properly. I'd also suggest that authors prepare short written instructions for their heirs with login instructions for the publishing platforms (Smashwords, Amazon KDP, etc) from which your heirs can access your accounts, update payee profiles (so payments and tax forms go to them, not you when you're gone), and manage your books. The more details the better. For example, if it's your wish that your ebooks forever remain immortal and for sale at all the retailers for the benefit of your heirs and their heirs, that's probably worth clarifying. If you want them to continue a desired pricing strategy (such as free for the series starter, and $3.99 for the rest), document that desire. It's the indie author's opportunity to guide publishing strategy for the benefit of heirs from beyond the grave. :)

Justin Szlasa said...

Very good analysis Mark. One other factor that deserves weight is the speed of receipt of payments. Money that gets to you faster is worth more...and with the traditional model money collected from a customer can take a lot longer (sometimes significantly longer) to hit your account than in a self-published model.

Jian Qiu Huang said...

My dear Mark

I agree totally with all you have said.

However, all you have said gets blown away if your potential recurring income was zero or near zero. I would be so bold to assume that 95% of indie authors fall into this category. So you speak the truth for 5% of all indie authors.

For the majority of indie authors, a potential upfront payment from a publisher can be rather attractive especially when they have been facing zero income and potentially zero future income. A discounted cash flow of zero income stream regardless of what weighted average cost of capital used is stil ZERO.

I get it that an ebook is an asset capable of generating an annuity. But the asset has zero present value if the annuity is potentially zero.

So faced with a present offering by a publicist compared to a zero present value of an annuity, many indie authors might be tempted to sell out.

However as for me, I prefer to retain my indie status for reasons other than the ones you have espoused in your blog.

Thomas Hill said...

Hi, Mark:

This is extremely valuable information. If more of my clients understood the value of their ebooks, they would be less desirous of a publishing contract with a print publisher and more willing to invest in ebook development and publishing. Changing their attitudes is oftentimes difficult, since many are set in their ways, but the math doesn't lie.

On another point, it looks like you forgot a preposition in the seventh paragraph ("many high-quality print books are forced out [of] print too early").

I look forward to reading more insights from you in the near future!

Mark Coker said...

@ Jian. Thanks for these comments. I'm in full agreement. By analyzing the projected income stream of an indie ebook, the author is better prepared to make an intelligent decision when weighing an offer from a traditional publisher. And as you correctly mention, there are reasons to self publish that have nothing to do with money. The Indie Author Manifesto identifies many of these benefits such as faster time to market and total creative control.

Thanks, Thomas. The missing preposition is now added!!

Greg Field said...

"This is especially true for fiction writers since great stories are evergreen."

Hi Mark,
I think you are right on the money. Quality stories will gain an audience eventually. The big problem for a new fiction writer in the current environment, however, remains visibility. The annuity may not bear fruit until some distant point in the future -- possibly after the author's death. The 'author 2.0' needs to be able to self promote almost as well as they can write (possibly more so). This in itself creates problems.
Thanks for an excellent post,
Greg (G.P.) Field

Martha W. Rogers said...

Great post. I am familiar with annuities as I am living on the income from one now. I never thought of ebooks like that, but it makes perfect sense and gives me the incentive I needed to start thinking seriously about the manuscripts I'd like to publish myself. I also needed the info you gave Anna about the wills. Thank you for the great information. It helped me a lot.