Announcement of Cengage Unlimited royalty calculation model raises new questions
Cengage’s royalty calculation model for its new subscription service Cengage Unlimited has raised a few questions that remain unanswered, primarily, will their model account for the range of existing publishing agreements—which have a variety of different provisions for accounting for royalties?
“Here’s the key problem,” said Stephen E. Gillen, a partner with Wood, Herron & Evans. “Cengage has a wide variety of different contracts that were entered over time. Some of their longer lasting titles, those in their 10th edition and up, are the subjects of original contracts still in place that were entered 40 or more years ago. Many of their contracts were not done on Cengage forms but were acquired from other publishers, all of which have different provisions for accounting for royalties. Some of them were done before the days of bundling, custom publishing, digital publishing, and publishing through interactive/adaptive learning platforms and so do not provide expressly for those then unanticipated media or channels of distribution. But Cengage has thousands of authors and almost certainly a greater number of contracts (no author will have less than one contract, and many will have multiple contracts). It’s hard for me to imagine that they are going to have lawyers go back over every single contract to determine if and how it should be treated in the current scheme.”
The Cengage Unlimited royalty calculation is based on four key components: total net sales revenue generated by Cengage Unlimited subscriptions; which is then allocated among three revenue pools consisting of courseware, ebooks and print rentals, based on the relative value of each to subscribers; quantity and usage for each title and product type; and the author royalty rate as set by the publishing agreement. This usage-based model means that every title used by Cengage Unlimited subscribers earns a percentage of royalties; that percentage is based on the relative value of each solution within Cengage Unlimited (e.g., courseware, ebooks, print rental), said Cengage.
Erin Joyner, Cengage’s senior vice president for product management, explained “title-specific sales” as what the student accesses once they have paid the subscription and entered Cengage Unlimited. “The usage by a student as they enter into Cengage Unlimited and what they choose to interact with determines what usage is represented and what is allocated into the revenue pools,” she said. “There’s a variety based on product types. There’s a courseware product type. Usage in that instance is when a student registers for a course we have an identifier called a course key that puts the student into the instructor’s course. With an ebook it will be determined by the amount of activity that a student has in that book. It’s not just one click of the ebook, but it is engagement with that ebook overall. With print rental it is the request of the print rental that is counted as usage. We will be gathering the data around what the student is accessing within Cengage Unlimited and allocating royalties based on the types of interactivity students have with them, and the frequency with which they interact.”
Joyner declined to share a sample equation for how they will pay royalties within Cengage Unlimited, saying: “That at this point is very specific, proprietary information that we will certainly be sharing with our partners as we have conversations with them, partners being authors, and others who it makes sense to share this proprietary information with.”
Joyner said the model they have developed for managing royalties and fair treatment of royalties under Cengage Unlimited “accounts for how we can, through contracts, distribute the products and the content very fairly and from a legal perspective. We are confident that the model we have created is covered in that way. All of the contracts talk about the distribution of author content and they recognize that there are different methods of distribution and that’s how we are thinking about this.”
David Slarskey, an attorney with Slarskey LLC, disagrees: “It’s an exercise in fuzzy math. Set aside the substantial question of whether each publishing agreement permits Cengage to distribute through a subscription model such as this. It is very difficult to conceive of a universal royalty structure, based on the allocation of funds from a fixed subscription model to multiple titles, that comports with the thousands upon thousands of unique publishing agreements underlying titles in Cengage’s catalog. The question of allocating relative value for any given title is highly problematic in this context.”
Juli Saitz, a CPA and senior managing director at Ankura Consulting Group, said she has a problem with the first step—the allocation of value among revenue pools. “Some titles don’t have associated courseware and some have a lot,” she said. “Under this model, it seems that something like a book on music theory, which may not have any associated courseware will automatically be devalued because it’s competing for dollars from other pools. I don’t agree with the methodology for a lot of reasons, but at a minimum, it should at least take a cut at being discipline-specific. I cannot think of any hypothetical one-size-fits-all calculation that would be equitable.”
Gillen said Cengage’s royalty calculation process, “if executed objectively and fairly would be okay. The hitch is that we don’t know, and they haven’t said how they will make their allocations to the various royalty pools and how they will allocate the royalties among the pools.”
“And, as Juli points out, they haven’t said whether or how they will adjust the process for differences in their author contracts (because, I suspect, they won’t). They have a wide variety of contracts from different sources (as a result of acquisitions from Houghton Mifflin, West Publishing, Wadsworth, Delmar, and many, many others) and from different eras (some of the old ones are only three pages long and don’t provide at all for bundles or custom publications or digital rights).”
TAA President and Cengage author Mike Kennamer said he is not surprised about the model: “It seems to be similar to models used to pay royalties on streaming music, which nobody can quite explain and seem to be plagued with issues. The million-dollar question is whether Cengage can increase market share enough to make up for royalty losses. I definitely hope they can, but am not sure I share their optimism.”
Since announcing Cengage Unlimited in December, the company has been undergoing a huge promotional campaign to sell the flat-fee subscription service to students, faculty, and even entire institutions through its Cengage Unlimited Institutional product. Its message is that Cengage Unlimited will lower the cost of students’ access to textbooks and other materials, by offering unlimited access to “all of the company’s digital higher education materials” for only $120 per semester. However, in a January 14 email to authors, the company said, “it will select works for inclusion in the Cengage Unlimited library based on several factors, including the scope of Cengage contracts.”
Cengage seems to be aware of the opt-out problem but has not determined how to deal with it. When asked by TAA whether authors could opt out, Joyner said: “It’s not really a yes or no. [That’s] why I’m struggling.”
“We have been talking to a lot of authors around how they will and won’t work within Cengage Unlimited, understanding that if they want to opt out what are their reasons and making sure that decisions are being made based on having all of the right information,” she said. “In terms of what we are giving access to with Cengage Unlimited is access to all of the materials that we have the right to distribute and sometimes that right to distribute isn’t just a reflection of an author’s contract but it’s about permissions and a lot of other factors that we have. So yes, we are reviewing contracts across the board, many different types of contracts that we have and at this point we aren’t running into major hurdles that would exclude products. So we are giving access to all products within Cengage Unlimited.”
Zick Rubin, an attorney, with Rubin & Ulrich, LLC, said: “Under many publishing contracts, authors have the right to approve certain uses of their materials in advance and they should be able to opt out of Cengage Unlimited if they are not happy with the way their work is presented or compensated.”
Subscribers to Cengage Unlimited will also be able to rent print textbooks for a $7.99 shipping fee, although the company is assuring authors that “Cengage Unlimited is not replacing traditional access to Cengage materials, and courseware can still be purchased standalone or as a bundle and print editions will still be available for purchase and rental obtained through traditional channels.”
Said Kennamer: “It is reasonable to expect that some people will continue to purchase the print textbooks, but I predict that the sales of print copies will decline significantly. It seems to me that rather than renegotiating contracts, they are going to try to make the current model fit. I’m relatively sure that Cengage will come out ahead and author royalties will be secondary, at best.”
Cengage author Pat McKeague said the Cengage Unlimited royalty calculation model is all too familiar, and didn’t work very well when the company assigned this same structure to content sold through its Enhanced WebAssign courseware: “When I look at what they are proposing, it reminds me of what they did with Enhanced WebAssign, when they put all the proceeds into a pool and gave each author a percentage of the pool. It was impossible to tell how many Enhanced WebAssign units sold with any of my titles,” he said. “And the payments were very small compared to what I had been making before that. Years after they started pooling the proceeds they had to adjust everyone’s royalties with a lump sum payment to each author. The payments were considerable, but there was no way to know if they were accurate. The pool idea is a bad one.”
Joyner said the company modeled much of Cengage Unlimited’s royalty calculation model based on their research into other subscription-based models, such as Audible and Netflix: “We have been researching pretty steadily how other content providers have worked with authors in a royalty-based way when they moved to subscription models so we looked closely at the Audible division of Amazon and things like Netflix to see how did they accomplish this as they moved into a subscription model. So we are confident this is a common way, an industry practice in terms of how you accommodate a royalty within a subscription model and its definitely fair and there’s precedence for it.”
Said Gillen: “It doesn’t matter what the audio book and movie industries are doing. Their business models and contract forms are very different from what is used in textbook publishing. All that matters is that they are doing this in conformance with what the author contracts require.”
Said Slarskey: “It remains to be seen whether Cengage’s strategy is more Netflix or more Napster, in terms of the legal issues raised. Napster, too, tried to disrupt the marketplace by spearheading new models of distribution. But it could not overcome the legal issues it created, which led to the death of the company.”
Rubin said Cengage Unlimited may turn out to be a good thing for both authors and students, “but authors will have to stay on their toes.”
Joyner said a large part of what they have been doing lately is focusing on increased communications with authors: “While we have been getting all the details finalized we have also been communicating with our folks and working hard to be very transparent and over communicate with people where we can.”
As part of this effort, said Joyner, in January the company formed a 14-member Author Advisory Board made up of “a representative set of authors as far as their reaction to Cengage Unlimited and the disciplines they represent.” She declined to name the members of the board, but she provided the name of one member who was willing to speak on the record.
Dr. Mark Ciampa, a Cengage technology author, and an associate professor of Information Systems at Western Kentucky University, said he was approached by his product manager to serve on Cengage’s Author Advisory Board. He said his responsibilities are to provide input to Cengage regarding the Cengage Unlimited product: “Cengage wanted to get feedback from current authors not only on the product itself, but also the process of distributing information to authors.”
Ciampa, who has published 25 textbooks with Cengage, said he is very positive about the opportunities Cengage Unlimited is going to afford authors. “Cengage Unlimited is going to afford the opportunity for my revenue stream to be more level and more consistent at a higher level,” he said. “And that is what I am hearing. And one of the things from the author perspective that is very attractive to me about Cengage Unlimited.”
The other members of the Author Advisory Board represent a wide range of opinions, said Ciampa: “I can say that there are other individuals that very much agree with me and I would agree with them on the outlook of it. There are others on it that would probably not agree. And there are some in the middle that are just not sure what to think exactly.”
Joyner said that the company’s product managers have been trained to explain the royalty calculation model in detail, and to share specifically how an author’s royalties will be calculated based on their contract. “We have developed a fairly robust set of documentation for the product managers to help them talk through these types of conversations,” she said.
Joyner and Cengage’s Chief Product Officer Fernando Bleicher will be hosting two informational webinars for Cengage authors on April 6 and 19. The company is also encouraging authors to reach out to their product manager directly or send an email to Cengage-Authors@Cengage.com, promising to respond within 3-5 business days. TAA encourages authors to participate in these informational sessions and to reach out to their product managers to get specific information on how their royalties will be calculated under Cengage Unlimited’s royalty calculation model.
“Like Cengage, authors have witnessed significant shake-ups and changes in the textbook publishing industry over the last 10-15 years,” said Brenda Ulrich, an attorney with Rubin & Ulrich, LLC. “They have also seen their royalty statements become ever more complex and incomprehensible. Transparency—both on the royalty formulas being adopted and their implementation for individual authors—is paramount for maintaining authors’ trust and good will.”
Said Kennamer: “If you are an author who is not part of TAA then you likely don’t have anyone with which to discuss these issues. It is through the collegial relationships formed through TAA with other authors, intellectual property attorneys, and royalty auditors that these questions start to take shape.”
For more information on Cengage’s royalty calculation model for Cengage Unlimited, visit:
Royalty Calculation Update | The Cengage Author Blog
Other TAA articles on Cengage Unlimited:
Cengage promises more details about how royalties will be calculated on Cengage Unlimited subscriptions by March
Cengage ‘will honor all contractual obligations’ with authors under Unlimited model
Authors express concern about new Cengage Unlimited subscription service