According to a provision in the Dodd-Frank financial reform law, the Securities and Exchange Commission will issue regulations requiring energy and mining companies to annually disclose royalties, license fees, production entitlements, bonuses, taxes and other payments linked to commercial development. Companies must identify the business unit that made the payments, the government that received the payments, and the specific project, according to the law.

“The new U.S. law will greatly increase the volume and detail that is available about the payment stream because it will cover payments to governments in all countries where the affected companies operate,” says Karin Lissakers, director of Revenue Watch Institute, the developers of the new index. “It also requires project-by-project reporting, so there will be a significant increase in the overall disclosure of these payment streams, which will tell us a lot about what the countries are receiving.”

To create the new ranking, Revenue Watch and Transparency International compiled public statements and disclosures by 41 governments about the money received for oil, gas, and minerals production. Transparency is crucial, they argue, to prevent government corruption and encourage accountability in how energy and mining revenue is used to promote economic development.

Brazil ranked No. 1 in government openness about energy management, followed by Norway, Russia, Mexico, Chile, Colombia, Kazakhstan, Peru, Azerbaijan, and Ecuador, according to the index. The United States was No. 10; at or near the bottom of the index were some resource heavyweights including Turkmenistan, Equatorial Guinea, Kuwait, Ghana, and Saudi Arabia.

The new SEC regulations should be in place for all publicly traded companies by 2012.  By law, the SEC must finalize the regulations by next July, but it faces considerable opposition from the energy industry.  The energy industry has long resisted regulatory scrutiny, but is set to experience a new level of attention, in particular to recurring payments such as licensing and royalties.

A major way for energy companies to ensure workflow continuity, and to ease the strain of heightened regulatory compliance, is to automate key accounting functions.  Chief among these are energy licensing contracts and energy royalty accounting.  As stricter environmental regulations have forced energy producers to incorporate technological upgrades, so too will the increase in transparency and regulatory standards.  The newest tool for energy producers in light of coming SEC requirements are likely going royalty software and rights management software systems.

Despite the prevalence of non-compete clauses in author contracts, many authors are venturing into e-book or multimedia agreements, risking lawsuits from their print publishers.

The benchmark 2001 case of Random House v. Rosetta Books set a precedent, when the New York Federal Court refused to grant Random House a preliminary injunction against Rosetta, an e-book publisher that was trying to publish electronic versions of Random backlist titles like Styron’s Sophie’s Choice and Vonnegut’s Breakfast of Champions.

And despite non-compete clauses in many author contracts, Sara Pearl, VP and Director of Business Affairs at Trident Media Group, said courts tend to favor the authors. “The courts don’t like to cut off how someone makes their living,” she said.

Of the Random House case, U.S. District Judge Sidney H. Stein says, “In [Random House’s] case, the ‘new use’ – electronic digital signals sent over the internet – is a separate medium from the original use – printed words on paper.” The court pointed out that Random House included separate language in its contracts for other forms of printed books such as large print, book club editions, and Braille editions, indicating that Random House did not believe that its contracts automatically granted the company the rights to all possible forms of its books.

Random House countered in December, when CEO Markus Dohle sent a letter to agents asserting that it holds e-book rights to all of its titles. Dohle called the 2001 judgment and other challenges to its claims “misunderstandings,” and pointed to Random House’s noncompetition clause as further proof that authors are prevented from “granting publishing rights to third parties that would compromise the rights for which Random House has bargained.”

Judge Stein made quite clear the limitations on the scope of the court’s ruling. The judgment was merely a “neutral” interpretation of contract law in Random House’s case, he noted in the decision.

“This is neither a victory for technophiles nor a defeat for Luddites,” he wrote, leaving the door wide open for new interpretations of other publishers’ claims.

Speaking at the panel, John Silbersack, an Executive VP at Trident, admitted that Amazon’s practice of selling e-books and print books next to each other on its website may give publishers possible legal ground to stand on.

“We’re talking about developing products that are going side by side” with print, Silbersack said. “It’s a little hard to argue that you’re not in the same space.”

Backlist titles are an attractive option for agents, because newer contracts often include the sale of ebook rights. “When you get to the frontlist, you cannot sell a book without selling ebook rights,” Pearl said. “The hot new thing is multimedia rights.” The new mobile or iPhone content is only restricted to 20-25% verbatim from the author’s work – the rest is “bells and whistles,” she said.

Publishers are also eager to capitalize on backlist titles; Silbersack said that agents are encountering pushback when they try to obtain termination notices for out-of-print books, something that he said his agency is “aggressive” about.

An author’s sale of multimedia rights is a publicity tool, not yet a major revenue source:

“It’s more of a forward-looking thing, a marketing thing,” Silbersack said. “They can make use of these features to reach beyond the book reading world.”

Though multimedia deals might not constitute the largest portion of a book’s revenue, it’s obvious that both agents and publishers are anticipating an major shakeout over these new platforms and neither camp wants to compromise their stakes.

“I don’t think that anyone can argue . . . that this is a battle that needs to be fought right now from a monetary perspective,” Silbersack said. “However, it’s a battle that needs to be fought to discuss what the points of tension are. Trident is beginning to test these waters.”

Pearl agreed that despite the hassle and the possible legal ramifications for authors selling multimedia rights, the panelists were enthusiastic about pursuing multimedia deals.

“I think you can’t fight it,” Pearl said. “Most of this is found money. Authors can control how the content is used, and they make a little bit of money. Right now, nobody’s doing anything with [the rights]. Net, it’s not a bad thing.”

The panel discussion also touched on Macmillan and Amazon’s agency model vs. trade model tug-of-war, and the much-debated questions over fair use that Google Books is currently mired in. In news from the OnCopyright Conference, also held last month in New York, Google’s Senior Copyright Counsel Bill Patry said the best approach to managing rights issues concerning the Internet was self-policing through privately sourced licensing agreements. Patry cited as an example the CHORUSS music copyright licensing service, which allows schools to pay a set licensing fee for unlimited use of a music catalogue within the schools. He recommended that trade groups stop lobbying so fervently for copyright as an “economic right” and instead seek actuarial solutions from the Copyright Clearance Center or ASCAP.

The panel featured four panelists: Neil de Young, Executive Director, Hachette Digital; Paul Aiken, Executive Director, Authors Guild; Lloyd Jassin, attorney; and Scott Waxman, Waxman Literary Agency.  Discussion focused mainly on the financial issues related to e-book rights, with a clear divide emerging between traditional publishing (Mr. de Young, and most of the audience members) and the other panelists, who mostly represented the authors.

All the panelists agreed that electronic books will ultimately increase readership and increase overall sales. According to Mr. de Young , sales data shows that the advent of e-books means consumers are reading more , while other panelists pointed out the prevalence of digital reading devices – in fact, two attendees in the front row were using iPad.  The general consensus was that  e-books present an opportunity to make a significant amount of money.

Mr. de Young, who for most of the discussion served as the de facto representative of traditional publishing, explained that the reduction in print costs for digital books does not make up for the additional costs of things like encryption, copyright protection, formatting, and online distribution. Since 90% of consumers still read print books, Mr. de Young said, there is now a demand for two warehouses, one physical, one digital, which also adds on costs to the publishing process, and ultimately necessitates a royalty rate similar to that of print editions.

From the other side, Mr. Aiken claimed that most of these digital costs were only one-time expenses (corroborated by Mr. Waxman), and that digital warehouses are much cheaper in the long run. He said that digital royalties could not remain at their current rate, and continued 25% royalties on e-books will cause authors to leave traditional publishers. Mr. Jassin thinks this issue will come to a head by 2013, when a new copyright law takes effect that will cause the contracts on many backlist titles to come up for renegotiation. He said that publishers have traditionally been unresponsive to the idea of new formats for books (citing a handwritten contract of Mark Twain’s that included a clause about new formats, with no mention of new royalties).  Mr. Waxman, however, expressed faith that traditional publishing houses were full of “enough smart people” that they would adapt.

While debate over royalties dominated the discussion, the panelists found unexpected common ground in the brick-and-mortar bookstore.  All four panelists agreed that the online shopping experience for books, whether e-books or print, was not as exciting or engaging for consumers as being inside a bookstore. Even the panelists who predicted a large digital shift would like to see bookstores stay in business, in order to maintain a physical, tangible presence for the book.

The takeaway is that keeping bookstores open – so that customers see books on shelves, and can browse them easily – is critical to the book industry’s health in the eyes of consumers.  At the same time, the internal battle over royalties, with competition between different platforms and retail sectors to provide the most attractive rates – is becoming an increasingly critical part of the behind-the-scenes book industry landscape.

As usual, a stronger reliance on royalty rates, royalty calculations, and royalty payments have in effect made royalty management the most mission-critical part of competition for any publisher.  It’s an area in which Excel spreadsheets and an overw0rked accountant no longer suffice.  One certainty is that all of the major players involved are using a dedicated royalty management software.

The similarities between the two publishing platforms extends to a royalty “sweet spot.” Amazon made waves by announcing last June that it would pay a 70% royalty rate on books priced between $2.99 and $9.99, and the Barnes and Noble plan has a similar incentive, offering a 65% royalty payment on books in the $2.99 to $9.99 range.

The Nook platform enjoys Barnes & Noble’s major market presence, plus its friendliness toward peer sharing and casual content browsing. It has a “Read in Store” feature, letting users browse an e-book in its entirety as long as the reader is physically in a Barnes and Noble store; and “LendMe” lets users loan their e-books out to friends for up to 14 days.

Self-publishing tools, offered by major retailers to independent and DIY publishers, is a sure way of broadening the content available in e-book stores. “The launch of our PubIt! platform further reinforces our long-standing commitment to authors and writers, and offers a significant opportunity to provide an even greater selection of reading material to our millions of customers,” Theresa Horner, director, digital products, Barnes & Noble said on Monday.

Of particular note to publishers should be the intersection of royalties and competing platforms; while market share battles drive down margins for retailers, royalty rates are emerging as a more prominent arena of competition. The ability to manage royalties – with all of the inherent royalty calculations, data management, and processing ability – is more than ever a necessity for staying competitive.

Of the Rosetta case, Lawrence writes:

“In denying Random House’s request for an injunction, the district court ascribed to this generally accepted definition of the word “book,” and found that the grant of e-book rights was not contemplated by contracts which preceded the invention of e-books themselves.

The court of appeal subsequently upheld the lower court’s decision, but noted in passing that “there is some appeal to Random House’s argument that an ‘ebook’ – a digital book that can be read on a computer screen or an electronic device . . . is simply a ‘form’ of a book, and therefore within the coverage of Random House’s licenses.”

And he concludes, unsurprisingly:

“the most important question — still remains unanswered:  Who owns the e-book rights to books published before the advent of e-books?

Right now the answer appears to be ‘Who knows?’”

This article will focus specifically on the royalty accounting functions of a royalty management system, and explore how you can evaluate a few of the more technical functions of royalty accounting software, in a bit more detail.

Ability to Quickly and Easily Investigate Artist and Publisher Questions:

It will be important to be able parse your data in many different ways, including ways which you may not yet have anticipated.  Does the royalty software system you are considering allow you to:

• View sales by authors/ID/title
• View royalty calculations by authors/contract
• Identify all titles for an author
• View all statements and payment histories for an authors
• Export research into spreadsheets

Flexibility in Accounting:

Even if your firm isn’t subject to the stringent accounting requirements of Sarbanes Oxley (see our article here), strength and flexibility in your royalty accounting functions is extremely important in running your business today, but also for preparing for future change and growth.  A good royalty accounting system will include capabilities for:

• Cross Collateralization
• Ability to pay on cash or accrual basis
• Ability to withhold reserves against returns

(Including reserves against all sales versus sales of specific revenue types)

• Advances

-Including: unlimited advances, unlimited types of advances (and other expenses against which royalties are applied)

-Ability to pay directly through your royalty software system

-Ability to specify tax information

-Ability to make payment to a third party

AP Integration

• Automated Integration

-Automated weekly/monthly/daily payout of advances

-Ability to feed royalty payment vouchers directly to AP

-Ability to cut checks directly from the royalty software

-Ability to designate “remit” payees (i.e. agents, heirs, children, etc.)

-Automated vendor/Authors feed from AP

-Store AP vendor IDs

• Ability to manage payments by payment window (i.e. 30, 60, 90, 120 days)
• Multiple addresses for each Authors
• Supports vendors on hold
• Minimum payment thresholds

Sales Integration: Some royalty accounting software systems will directly integrate with your existing sales systems.  If you use a CRM system such as Salesforce, check to see if the royalty software you are considering will directly import and export data into it.

Contract Migration: If you have a large number of contracts, it may be worthwhile to find a royalty software system that will directly import this data, including past payments, customer/supplier info, and other pertinent data.

Customizations: Even you don’t currently need any customized features, it makes sense to ask about future customizations.  Ask about what any related costs would be, plus what the turnaround time would be for implementing customizations. 

Statement Design: Having a number of options for managing or viewing statements is a fairly standard feature of any royalty software system.  But because having statements available in the way that you or your clients want is so important, it’s a good idea to ask some general questions about this.  Ask about various file formats, file sizes, the inclusion of graphics or graphs, compatibility with mobile devices, etc. 

For publishers already faced with complex royalty contracts and labyrinthine sub-rights agreements, the requirements of Sarbanes Oxley compliance can present an unwelcome layer of additional complication.  However, just as with other technical aspects of royalty accounting and rights management, there are tools to help.  As part of an ongoing exploration into finding the best royalty software, and the best rights management solutions, today I will outline several ways to make “Sarbox” compliance easier within your royalties accounting structure.

Sarbox obviously wasn’t targeted specifically at the publishing industry, and thus has many stipulations that are, if not irrelevant, less than critical to publishers.  However, all publicly held corporations – publishers included – are subject to the act’s regulations, which set a number of reporting and accountability benchmarks.  If you use, or are considering, a dedicated royalties software solution, finding one that automates your Sarbox requirements can save time in day-to-day operations, as well as making any audits that may be required much easier.  There are five general function areas to look for, to find the best royalty software solution for your firm.

Segregation of Duties
Approvals
Audit Trail
Read-only Access (to data “owned” by other systems)
Support of Enterprise Security through Active Directory

Segregation of Duties
Separation of Duty (SOD) is a security principle whose primary objective is the prevention of fraud and errors. This objective is achieved by disseminating the tasks and associated privileges for a specific accounting process among multiple users.

At some point in your ERP (enterprise resource planning), an administrator will have to map out whch employees will have responsibility and access for specific areas of the rights and royalties management workflow. Once the general framework for division of duties and responsibilities is created, the amount of time spent on SOD compliance can be minimized by using software that automates the separations.

SOD compliance at its most basic can be simple within a good royalties management software system. However, not all royalty software has the functionality needed. If you are shopping for a royalty software solution for a publicly held publisher, SOD functionality should be on your shortlist for royalty accounting features.

Approvals
Sarbanes Oxley also establishes tighter control over events significant within the royalty accounting process, such as author advances that exceed budget, significant write-offs, extraordinary deferrals, or exceptional financial variances. Complying with Sarbox in with regard to these anomalies typically means having a structure in place so that the appropriate employees are notified when such instances occur, and creating a paper trail to document this notification.

There are many ways to meet these requirements, but the only way to do so efficiently within your royalty accounting workflow is to automate it. Therefore, a good royalty software solution will have provisions for creating an auditable record of approvals. Again, not all royalty software has this functionality built in, though the better systems do.

Audit Trail
Unsurprisingly, an well-defined audit trail is mandated by Sarbox. One way to approach this area is to evaluate how customizable the reporting functions of your royalty software are. A royalty software solution that touts an in depth auditing feature, but doesn’t offer customization of reports, may end up not working for you down the road, as your business changes.

Read-only Access (to data “owned” by other systems)
In many ways, having more data available to more of your employees is good for your company’s overall health. An employee linked into the bigger picture is more motivated than one who has a myopic perspective on the company’s goals, especially when the restrictions are due to something as dryly bureaucratic as Sarbox compliance. In addition, greater data availability gives employees the freedom to compete at 100%, without delays in accessing key company knowledge.

However, many of your royalty accounting documentation can fulfill it’s purpose while being read-only. In fact, you may already have such safeguards in place in your general database. Finding a royalty management solution that supports read-only documents can be critical in maintaining royalty accounting best practices, while also staying competitive.

Support of Enterprise Security through Active Directory
An effective security solution is always a trade-off between security and ease of use. Ease of use usually means less or even no security, while good security can mean no ease of use. A balance is key in royalty accounting software; security is important for obvious reasons, among the reasons ease of use is important are that your royalty accounting software will need to accommodate changes in the publishing industry that are sure to arise.
Active Directory is a Microsoft-created technology which allows administrators to assign policies, deploy software, and apply critical updates to an organization, and stores information and settings in a central database.

Royalty software which has integrated Active Directory to ensure security is making use of a proven enterprise security framework, one which is the industry standard. The best royalty accounting solutions will have complete Active Directory integration.

Again, these are just the basic starting points for ensuring that your Sarbox compliance is painless as possible for your royalties accounting operations.

Among the few certainties in the environment publishers face today is that the simple number of royalties calculations factoring in to any contract has risen dramatically.

In this first article in a series on the importance of royalty software, I will extrapolate a bit on this point:

Complexity of Contracts in the Current Publishing Environment:

Once upon a time, book royalty contracts stipulated royalties based on a simple percentage of all books “sold,” and royalty accounting was a minor part of a big publisher’s overall accounting workflow.  Now, the sheer number of calculations involved in figuring out royalty amounts, plus when these royalties need to be paid, are mind-boggling.  In each of the basic categories of hardcover, trade paperback, and mass-market paperback, there are separate calculations for print, e-book (both wholesale and agency), physical book (again, both wholesale and agency).

Simply keeping on top of all of this royalty accounting is hard for even the largest of publishers, who often have entire departments dedicated to royalty management.  Consider the experience of the large publisher Rowman and Littlefield, whose Vice President of Customer Service, Carla Quental recently said after the company began using royalty software:

“Before MetaComet® Systems, royalty tracking and reporting was a nearly insurmountable challenge.  We now have a very smooth process which enables us to meet the needs of our authors, editors, and CFO…It has been a great investment.”

Indeed, large publishers have long realized that dedicated royalty software is the only way they can realistically meet their royalty accounting needs, with accuracy and efficiency.  At Harcourt Education, Assistant Controller Mark Silverman recently said:

“Accounting for royalties is incredibly important and also incredibly difficult because we have literally tens of thousands of contracts with authors, and each one needs to be tracked in a timely and accurate manner.”

The biggest book publishers have the most complex royalties contracts to negotiate, but also typically have largest amount of resources to devote to managing their rights and royalties contracts.  A quick look at how the big publishers have chosen to manage this issue shows that they have virtually all elected to use some version of purpose-built royalty software.  In our next feature, we will explore how smaller publishers, who face many of the same rights and royalties challenges, can utilize royalty software that fits their needs.

“The publishing industry is in a state of turmoil. New sales channels are arising, new formats, new terms of sale.  Authors deserve the chance to renegotiate as the industry evolves.”

The goal of Nash’s start-up, Cursor, is to free up authors from having to carving out rights and royalties. Instead, they hand almost everything over to the publishers and give them maximum flexibility to experiment with format, pricing, sampling, enhancements, and territory –  for a very limited time, and at the end of that period, everyone reassesses.

A switch to this kind of contract would upend the current rights model in publishing and force the legacy businesses into a massive reorganization, probably involving no small degree of shrinkage. Is this the way forward?

A free WEBcast from Digital Book World, Rethinking Contracts and Copyrights, will explore the challenges and opportunities presented by digital rights (e-books and beyond), and discuss alternative models that publishers and authors are experimenting with.  Topics will include:

• Are ebooks a primary or subsidiary right?
• Are there viable alternatives to life-of-copyright contracts?
• How can publishers fully exploit “a fairly broad basket of rights”?
• Are such deals in an authors’ best interests?

CONFIRMED SPEAKERS

• Jason Allen Ashlock is the co-founding Principal and Manager of Movable Type Literary Group, which seeks to meet the needs of an industry in transition by serving authors and publishers at each point on the creative continuum. Prior to MTLG, Mr. Ashlock worked as an Associate Agent with Marianne Strong and Associates, while completing graduate work in both American literature and Religious Studies.
• Devereaux Chatillon is a media and commercial litigator in Sonnenschein Nath & Rosenthal LLP’s Litigation Practice. During her 30-year career, Ms. Chatillon has worked in all facets of the media and entertainment industry, including most recently as Senior Vice President and General Counsel of Scholastic Corporation, the global children’s publishing, education and media company. Ms. Chatillon has also counseled and represented book publishers, movie studios, magazines, newspapers, internet content providers, television and cable entities, and independent film producers.
• Jim Hanas is the author of Cassingle: Five Stories (2009) and Single: Two Stories (2006), two e-book collections of short stories that previously appeared in McSweeney’s, Fence, One Story, the Land-Grant College Review, Joyland, and elsewhere. In the fall, Joyland and ECW Press will release Why They Cried, an expanded e-book collection including these and other stories.
• Richard Nash ran Soft Skull Press, now an imprint of Counterpoint, from 2001 to 2007 and ran the imprint on behalf of Counterpoint until early 2009. He’s now consulting for authors and publishers on how to reach readers and developing a start-up called Cursor, a portfolio of niche social publishing communities, one of which will be called Red Lemonade. He was named one of “50 Visionaries Who Are Changing Your World” by Utne Reader, and one of “15 Twitter Users Shaping the Future of Publishing” by Mashable.com.

Moderated by Emily Williams, co-chair, BISG Rights Subcommittee.

Rethinking Contracts and Copyrights will be webcast live on Tuesday, September 28th @ 1pm EDT / 10am PDT

“Under the Amazon plan, the publisher or author sets the price of an ebook and gets a royalty of 70%.  Sounds good so far. But if another vendor is selling the same book at a lower price, Amazon has the right to match it, without further consultation with the author.  If the author prices the book at $9.95 and a competitor begins to sell it for $5.95, Amazon immediately lowers the price, and thus the royalty paid to the author.”

Technology has been touted as a way to give authors more freedom in how they produce and sell their work, and how they get paid for it.  But some of that technology is at the same time creating new problems for authors and publishers in rights and royalties management.