Presentation Slides - TAA * Text and Academic Authors Association

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Dec 14, 2013 (3 years and 7 months ago)

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An e
-
book Update

TAA 2012 Conference

New Orleans

Presented by

Steve Gillen

Wood Herron & Evans

2700 Carew Tower

441 Vine Street

Cincinnati, OH 45202

sgillen@whe
-
law.com

513.241.2324 ext 470

www.whe
-
law.com




Copyright © 2012 by Steve Gillen. All rights reserved.

What I hope to cover . . .


What is an e
-
book?


What do we know about the business model?


What about royalty rates?


What are the contract issues?


What’s happening in the courts?


Questions at anytime


What is an e
-
book?

What is an e
-
book?


PDF;
epub
; .
prc
/Kindle (
Mobi
)


iOS

and Android Apps


XML; Daisy; Adobe Digital Editions


iBook Author (authors, watch out for this
one!)


ILS (integrated learning systems)

What is an e
-
book?


Archos Diffusion


Broadband
eBooks (BBeB)


Comic Book
Archive file


Compiled HM


DAISY
-

ANSI/NISO
Z39.86


Desktop Author


DjVu


eReader


FictionBook

(Fb2)


Founder
Electronics


Hypertext
Markup
Language


IEC 62448


Microsoft LIT


Mobipocket


Multimedia
eBooks


Newton eBook


Open Electronic
Package



Portable
Document
Format


Plain text files


Plucker


PostScript


SSReader


TealDoc


TEBR


Text Encoding
Initiative


TomeRaider


What is an e
-
book?

Market share (anecdotal)


Amazon Kindle

B&N Nook

Apple iBook

Others

What is an e
-
book?


2012 BISG Study reports that the market
is moving away from dedicated e
-
readers
toward tablet devices

What is an e
-
book?

Net result is that it is more complicated to
make an e
-
book than it is to make a video
(because one format will not work on all
devices)

What do we know about the business model?

What do we know about the business model?

-

0
10000
20000
30000
40000
1990
2010
US Publishers

US Publishers
0
200
400
600
800
1000
1990
2010
Textbook Publishers

Textbook Publishers
What do we know about the business model?

Trade ≠ Textbooks


500K books registered for ISBN in 2008


3MM books in 2010


315K traditional titles (+5%/year)


2.8MM non
-
traditional (+100%/year)


Total = $30B/year


Textbooks = $10B/year

What do we know about the business model?

eBook Sales Are Growing Rapidly

+112% 2010 Q3

What do we know about the business model?


e
-
book sales projected to grow at worldwide rate
of 30% from 2010 to 2015 (and at this rate will
double every 2.4 years)


Most of this growth in text
-
only trade books


Still, not more than 5% of total market is e
-
books
(and probably much less in textbooks)

What do we know about the business model?


Unlike trade publishing, in textbooks there
hasn’t been the same level of market
acceptance of one or a couple common
platforms

What do we know about the business model?


CourseSmart



founded in 2007 by Pearson,
Cengage
, McGraw
-
Hill, Wiley, & Macmillan


Interoperable through any learning
management system (LMS) in use and any
device with internet connectivity and a
browser


Now distributes for more than 30 other
publishers and claims to offer 90% of
established core textbooks

What do we know about the business model?


Colleges are also concentrating buying power:


In 2010, Cal State, in partnership with
Cengage
,
CourseSmart
, and
Follet
, began offering a digital
textbook rental program to its students (60% off
printed book price)


Claims to have saved students $62MM so far and
expects that to increase this year to $118MM with 5000
students participating


IU program started in 2010 now has 50
participating institutions


What do we know about the business model?


2012


5 colleges (Cornell, UC Berkeley, U
of
Minn
, UVA, and U
Wisc
) team up with
Internet2 to pool e
-
book buying power


Driving prices down, but (at least in
theory) volume up, since an e
-
book isn’t
re
-
sold

What do we know about the business model?


Then there’s
Chegg



book rental business;
started 2005, national in 2007


Buys books wholesale or in the market


Chegg

expects to turn each copy 3
-
4 times


Publishers realize revenue only on initial sale
unless they partner with
Chegg


Chegg

claims to have saved students $210MM in
first three years of operation (less than 1% of the
$10B annual textbook business)

What do we know about the business model?


Expense Components


Cost of Goods Sold (PP&B) and Fulfillment


Royalties


Development and Prepress (recouped over life
sales)


Overhead (Fixed in the short term)

What do we know about the business
model?


CGS & fulfillment will be less for e
-
books, but
not zero (50 cents for DRM + 3
-
7% for
payment processing + 2
-
30% for 3
rd

party
distributor)


Comparable costs for print books may reach
30%, but publisher will have to cover the
fixed expenses with the remaining margin
with fewer units at a lower price

What do we know about the business
model?


If textbook publishers sell fewer than 1 e
-
book for every print book


Then for every $1 that a print book
contributes to cover the pre
-
press and
fixed costs, an e
-
book has to contribute
$20

What about royalty rates?


Not much is new


still much uncertainty


e
-
book rates in textbook publishing (where
there is a specified e
-
book rate) tend to be
the same as the domestic print rate


e
-
book rates in trade tend to be 25% of net
receipts; but their domestic rate is
typically 12% of
cover price
(or 2X net
receipts)

What are the contract issues?


Who has the rights?


Is it a license or a sale?


How are the bundle proceeds allocated?


Have you captured all of the revenue?

Who has the rights?


Harper Collins v. Open Road (pending)


1971 vintage trade book contract granted
HarperCollins the exclusive right to publish the work
“in book form”


Open Road contracted with the author circa 2010 to
publish an e
-
book edition, arguing that in 1971, “book
form” meant printed book


In 2001, a federal court interpreted substantially
identical language from a 1967 Dell contract
not

to
include e
-
book rights


If your contract is early 1970s or before and has not
been amended since, maybe you have them!

License or Sale?


Copy sale rate (10
-
15%) vs. license rate (50%)


Contract interpretation questions on both ends of
the transactions at issue


Any single case not likely to have broad impact


Driven by language of the contracts


As interpreted under applicable state contract law


Perhaps including
parol

evidence


License or Sale?


Contract interpretation issue:


Meaning of license vs. sale


Question of fact or law


Presence or absence of integration clause


Impact of ambiguity


Intent of the parties


Admissibility of
parol

evidence

License or Sale?


Some generic rules of construction:


Construction of a written contract is a matter of law for the court


Primary task is to ascertain and give effect to the intent of the parties


A contract that is clear and unambiguous will be enforced as written


If the writing is clear, the court presumes that the parties’ intent resides in the words of the
agreement


When a contract is susceptible to two or more reasonable interpretations, resolution of the
ambiguity is for the
trier

of fact.


In practice, it will be resolved by the court if rules of construction do not require the court to go
beyond the four corners of the document


Giving terms their ordinary meaning


Unless they have a special meaning in the industry or trade (sale vs. license)


Law presumed to be part of contract


Construing an ambiguity against the drafter


Construing a term in context of other terms


If extrinsic evidence required, some courts refer to fact finder, others work to resolve the ambiguity


Contract is read as a whole


Practical construction
--

how the parties have acted, post contract

Book Contracts

Representative Extracts from the
Last Quarter Century

1976 Textbook Contract

The Publisher shall pay to the Author . . . the
following percentage of the Publisher’s net
receipts on all
copies sold
. . . (15
-
18% of net
receipts)


On
licensed uses
, 50% . . .

On
uses of subsidiary rights
by the publisher
50% . . .


1988 Textbook Contract

The Publisher will pay the Author a royalty on the
amount received by the Publisher for all
copies

of
the Work
sold

by the Publisher, as follows: (15
-
17%
of amount received)



Included in the rights granted to the Publisher . . .
is the exclusive
right to license
the exercise of any
of the rights granted to the Publisher above, and
the author shall be entitled to 50% of the amount
received by the Publisher under any such license.


1991 Textbook Contract

Except as otherwise provided below, the Publisher
will pay to the Author the following royalty based
upon the Publisher’s gross proceeds from
sales by
it of copies
of the Work . . . (5% of gross proceeds;
one of several coauthors separately signed)



In the event the Publisher enters into agreements
to
transfer, sell, or license to others

the right to . . .
the Publisher will pay to the Author 50% of the
Publisher’s net receipts . . .

License or Sale?


Sales by the publisher or an
unincorporated business unit direct to the
end user are likely to be at the domestic
rate


Sales through a licensee (like
CourseSmart
) may well be subject to the
50% sub rights rate . . . depending . . .


eBook Distribution Contracts


Licensing (aka “wholesale”) model


Amazon


Google


Agency model


Apple


(and some Amazon deals, but this is short
lived)

Amazon Digital Publication Distribution
Agreement/ Kindle Direct
Ts&Cs



Grant of rights


You hereby grant to us . . . a nonexclusive,
irrevocable right and license to:


Reproduce, display, distribute, adapt, create derivative
works, transmit, etc.






Google Books Partner Program



All content provided is referred to as the
“Authorized Content.” Google may digitally scan
the Authorized Content, store it on Google servers,
and in response to requests by end users of
Google’s services, display search results relating to
the Authorized Content




Agency Model
Ts&Cs



Publisher hereby appoints [Agent] as its non
-
exclusive agent for the marketing and delivery of
eBooks through the online store on Publisher’s behalf . . .



In furtherance of such appointment, [Agent] may:


Market, solicit and obtain orders on Publisher’s behalf

Make copies of, format, and otherwise prepare Content Files as eBooks

Provide storage, searching, and hosting services to Publisher



Agency Commission (not royalty)



[Agent] shall condition use of eBooks on an end user’s acknowledgement of terms of use (not end
user license)



Parties agree that the nature of their relationship is that of Publisher as principal and [Agent] as
agent.



[Agent] agrees to limits on its authority as agent.

Agency Model

End user form is styled as
Ts&Cs

(not as a EULA)



Does not contain license language but speaks
in terms of limits on use and compliance with
usage rules; also avoids use of the words sell
or buy and talks instead in terms of “delivery”
of the product


Statutes of limitation

Range from 3 to 15 years

License or Sale?


Bundle allocations


Where the publisher bundles all/some of a digital
version of your work with other digital components
(including some publisher
-
produced support
elements), it will allocate the gross revenue among the
components and only pay your royalty on your
allocated share


The allocation and method of allocation are usually
opaque; and they may not be reasonable or fair

Don’t Leave Revenue Off the Table


Not all revenue attributable to the
exploitation of your work will always be
either from sales or licensing


One day, some revenue may be from traffic


It would be best if your contract
anticipated this

What’s happening in the courts?


Kno

v.
Cengage


Google books cases


Hathi

Trust case


DOJ v. Apple et al.


Georgia fair use

Kno

v.
Cengage


Kno

is a distributor of e
-
books for at least 4 major textbook
publishers, including
Cengage


Cengage

threatened to terminate its distribution agreement
with
Kno

because the
Kno

apps allowed users to generate
derivative works


Kno

sued
Cengage

in January for breach


Case was quietly dismissed in mid April


we don’t
kno
(w)
why


The
Cengage

contract would have expired in the fall anyway


But as of early this month,
Kno

still listed 100+
Cengage

titles
as available

Google Books Cases


Authors Guild and a group of publishers each sued Google
over its plan to scan the collections of 5 major libraries and
make them available as a digitally searchable analog to its
web
-
based search business


Case appeared to have settled after years of negotiations in a
complicated opt
-
in/opt
-
out licensing scheme


Amid great controversy, the district court refused to approve
the settlement


Cases are back on and presently before the court on standing
issues and for summary judgment on the question of fair use
(set for argument in the fall)

Hathi

Trust Case


One of the concerns of rights holders in the Google
Books case was that Google was providing each
participating library with a digital copy of the
works it contributed


uncertainty about what
might be done apart from Google’s announced use


Lo and behold, several of the libraries joined to
form the
Hathi

Trust to make those works freely
available to the university communities


So the Authors Guild sued them (case is pending)

DOJ v. Apple et al.


Early this year the DOJ sued Apple and 5 of the big 6 publishers for
conspiracy in restraint of trade (Penguin, Macmillan, Hachette, Simon &
Schuster, Harper Collins; not Random House)


In 2007, the Kindle dedicated e
-
reader was introduced by Amazon. Amazon
bought e
-
books for the Kindle from publishers using the same sort of model
used for print books (has come to be known as the wholesale model


publisher sets the wholesale price to Amazon, and Amazon buys at that
price; but resells at any price it wants


price for most books became $9.99,
even where that meant that Amazon was losing money on each sale; result
was to drive the price down and drive Amazon market share up,
approaching monopolistic market control


in 2010, Apple struck deal with the 5 to provide books for
iPad

on agency
model


publisher sets retail price, Amazon keeps 30% ; publishers’ deals
were all done within days of each other, all on nearly identical terms, same
price floor, all with MFN provision; prices rose to $12.99
-
14.99





Cambridge/OUP/Sage v. Georgia State
University



Copyright suit by publishers over university e
-
reserve
policy


Court’s opinion is 350 pages long


99 works at issue in the suit; publishers lost on 95 of
them, then issued a press release touting their win:




“We are pleased that the District Court ruling recognized
that Georgia State University’s flawed 2009 copyright
policy resulted in infringement of our works.”



Pearson/
Cengage
/Bedford v. Boundless


Boundless


Boston based start up


$10MM in capital


In Beta


offers shadow textbooks to students
for free


Claims not to infringe copyrights of books
shadowed


Publishers
think otherwise

-

Questions?