UNBUNDLING THE "BUNDLING" CLAUSE IN COMPUTER BOOK CONTRACTS


IVAN HOFFMAN, B.A., J.D.


Authors all have it. They may not have noticed it but they have it-that seemingly innocuous clause buried within the bowels of the royalty section of computer book publishing contracts that deals with the author's royalties when the book is "bundled" with some other product. This other product can be a CD-ROM, some software, even a promotion. It can be a bundle put together by the publisher or by a licensee from the publisher.

WHAT THE CLAUSE LOOKS LIKE

There are a number of variations on the clause. Sales via "bundling" may be referred to as "special sales," often lumped together with sales at "deep discounts." The publisher then pays a substantially reduced but fixed royalty rate on such sales. If the author reads the contract carefully, the author may be surprised at the substantially reduced rate.There is often no relationship between this low rate and any similarly reduced income being received by the publisher. Indeed, the publisher's income may in fact be substantially higher than in a normal sale since, if the publisher is the packager of the bundle, the retail price, and accordingly the wholesale price, may be commensurately higher. So on a higher income sale, the publisher is paying a lower royalty rate. While costs to put the package together are of course also higher, those costs are often far less per package than the reduced royalty rate would call for. So this may be a very high profit item for the publisher.

What is the effect on the royalty when the book is bundled? The answer depends upon what products are being bundled, by whom and the total package price that the bundled package is sold for.

Example. Assuming that the publisher bundles the package itself.

Let me put some numbers in here. Suppose a normal trade channel royalty to the author of 10% of the publisher's net receipts. Suppose a provision for bundle sales of 4% of the publisher's net receipts. Suppose a retail price of the book of $50.00 and a wholesale price of $25.00. Normal royalty: $2.50 to the author. Bundled royalty: $1.00. That's a 60% reduction even though the package may be considerably more valuable especially if the price of the bundle is higher than the book alone. WARNING: use these numbers for comparison. Your royalty (and mileage) may vary.

But the clause may also be a great deal more open ended and may look something like a provision whereby the publisher takes the amount it receives (the basis for calculating the royalty to the author) and multiplies it by a fraction comparing the price of the book with the total price of the package.

Example. Assuming that the publisher bundles the package itself.

If the suggested retail price of the book standing alone is $50.00 (outrageous I know but realistic nonetheless), and the bundled package containing several items including the book sells for $100.00 (unlikely but easy to do the math), then the author's normal, trade book channel royalty rate is effectively one-half of what it appears to be. This is so because the amount received by the publisher, which is the wholesale price, is, in this example as well, 50% of the retail price. [In practice, however, this is often not so and the discount from retail to wholesale may be even 60%]. So the amount actually received is $50.00.

Under this version of the clause, the publisher then multiplies this $50.00 by a fraction represented by the price of the unbundled book ($50.00) divided by the total price of the bundled package ($100.00). Thus, $50 times ½ = $25.00. So the author's royalty is x% of $25.00.

Assume an author royalty of 10% of the amount received by the publisher [i.e. wholesale price]. Assume the same retail prices as above. The royalty is 10% times $25.00 [$50.00 times $50/$100] or $2.50 per book when sold in the bundle.

If the author had been paid the author's royalty on the book without it being included in the bundle, the royalty would be the same ($2.50) since the amount received by the publisher [i.e. the wholesale price] would be $25.00 on the $50.00 book.

Since presumably the publisher bundled the author's book with some other product or software because the book added value to the package, the author is not getting the ride off that value added. The author is getting only what the book would bring unbundled.

However, the publisher is receiving twice the amount on the package but only paying the same dollar and cent royalty as it would on the book alone.

Ordinarily, this is a money issue under any circumstances. But suppose that the original work is a book and a CD-ROM. Is this a bundle for the purposes of this clause meaning that the author actually gets half of the otherwise stated royalties? [Assuming the same prices even though I realize that adding a CD-ROM might not double the cost to the consumer but the simplicity factor is at work here.] The response is that this should be spelled out in the contract so that such an inclusion of a CD does not reduce the royalties to the author.

Example. Where the publisher licenses the book to a third party for bundling.

If the publisher licenses the author's work for use in a bundle put together by a third party, then the contract should state that the licensing clause governs that deal and not the bundling clause. Under the licensing clause the author is usually getting half of what the publisher gets. Hopefully.

But suppose the contract is unclear and suppose for example that the publisher licenses the book to a third party who then sells the bundled package. The publisher may then receive a royalty per package in the neighborhood of 15% based upon the percentage that this book bears to the total package price. So the publisher receives a royalty of $7.50 in this example. [15% times $50.00 i.e. the wholesale price]. The publisher then has a couple of choices: it can read the clause literally and then multiply the $7.50 by one-half because the book represents only one-half of the total retail price of the package and then multiply that amount [$3.75] by the author's royalty of 10% so that the author receives 37.5 cents per unit sold. Somewhat of a drop from the $2.50!

But this appears to be a double reduction to the author since the amount received by the publisher has already been subjected to the fractional calculation by the license agreement. In other words, the amount received by the publisher is already reduced by the ratio of the price of the book divided by the price of the total package. To then use that same fraction in calculations with the author seems unfair and unnecessary.

So the other choice is that the publisher may read the clause a bit more generously and multiply the author's royalty by the amount received and not again in half. In that instance, the author's royalty would be 75 cents [10% times $7.50]. Still a rather significant drop in dollar and cent royalty to the author!

CONCLUSION

These clauses are merely examples and each contract has to be examined on its own merits. But the sum of it all is that the clause has to be looked at carefully. No matter which way the bundle is put together, it appears that it is the author that loses even though the book itself may be a significant contribution to the package as a whole.

© 1996 Ivan Hoffman

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This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.


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