Why Lena Dunham's Advance Is Not as Crazy as It Seems (Or: The Earn-Out Fallacy)

AUSTIN, TX - MARCH 12:  Writer/Director/Actress Lena Dunham attends 'Girls' Greenroom Photo Op during the 2012 SXSW Music, Fi
AUSTIN, TX - MARCH 12: Writer/Director/Actress Lena Dunham attends 'Girls' Greenroom Photo Op during the 2012 SXSW Music, Film + Interactive Festival at Paramount Theatre on March 12, 2012 in Austin, Texas. (Photo by Michael Buckner/Getty Images for SXSW)

The publishing and media worlds were abuzz on Monday with news that Lena Dunham, creator and star of HBO's Girls, received a reported advance between $3.5 and $3.7 million from Random House following a heated bidding war for her first book. There have been enough opinions offered about this sum, so what I'd like to do is shed some light on this deal using actual, you know, math, without throwing out random comparisons a good deal of people who know nothing about publishing like to do. Without question, $3.5+ million is a lot of money. Maybe the largest advance ever paid to a first-time author who wasn't either a president, pope, Rolling Stone or former host of Weekend Update With Jimmy Fallon. But that doesn't mean it's necessarily a bad business deal. Let's examine why, with a simplified version of the way publishing economics work.

First off, there is an awful tendency by publishing and media 'reporters' to base a book's financial success on whether a book sells enough copies to earn out its advance. (In lay terms, when an author receives an advance, the book in question must sell enough copies for the publisher to recoup that advance before the author earns another cent.)

If an author receives a:
$100,000 advance

And a cover price of:

With a standard 15 percent hardcover royalty, the author makes:

Which means the book must sell:
26,667 hardcover copies before the author makes more than his/her advance
(Not taking into account paperback sales, ebook sales, audiobook sales, foreign rights, etc. Simply put: there are more ways than simply print sales to recoup the advance.)

Now, Jeff Bercovici at Forbes wrote about Dunham's deal with the terribly misleading and completely unknowledgable graph:

Depending on how aggressive her agent, Kim Witherspoon of Inkwell Management, was and where Random House elects to set the cover price, it means the book will likely have to sell something in the neighborhood of 1 million copies for Dunham to earn out her advance -- ie. to reach the point at which she starts earning royalties for every additional copy sold.

That figure probably wasn't arrived at by accident. It's how many copies Bossypants, the book of comic essays by Tina Fey published in 2011, sold in its first six months. Fey reportedly received a $5 million advance.

What are the chances Dunham, a veteran of FORBES's 30 Under 30 and Power Women To Watch lists, can replicate that feat?

I'll answer that question simply: it doesn't matter one bit. To anyone who knows anything about publishing, a book does NOT need to earn out its advance in order for its publisher to make money. Sometimes a lot. Which is why they can afford to pay writers like John Grisham and James Patterson closer to, if not more than eight figures per book, knowing they'll never earn out. So whether Dunham sells as many copies as Tina Fey is completely irrelevant. Here's why.

Publishers sell their books to retailers at a discount, generally about 48-50 percent (let's use 50 percent for this model). With the remaining half, that money is divvied up between paying for printing/binding, marketing, co-op, overhead, author royalties, etc. As mentioned before, an author does not start receiving any royalties until their advance has earned out. But let's take a look at how many copies Dunham would have to sell in order for her publisher to turn a profit, regardless of whether Dunham makes another dime.

Let's assume Dunham's book sells 300,000 copies in hardcover at $25/book and another 150,000 in paperback at $14/book (fewer sales than Tina Fey, still hefty sales but ultimately realistic):

300,000 hardcovers at $25 with a 50 percent discount =

150,000 paperbacks at $14 with a 50 percent discount =

Total sales revenue: $4,800,000

Taking out Dunham's $3.5 million advance, that leaves:
$1.3 million in revenue

Obviously the book will be supported by a hefty, six-figure+ marketing campaign, and those 450,000 hardcovers and paperbacks aren't free to print. Yet as you can see, even with (relatively) modest sales numbers, Dunham's publisher still makes well into seven figures. Yes, a chunk of that will go to marketing, overhead, printing/binding, but it still leaves them with hundreds of thousands of dollars in profit, far, far more than is made on the average book. And again, if the book exceeds these sales numbers, that profit margin only grows. And this is not taking into account ebook sales, audiobook sales, first serial rights, all of which may be worth large sums.

Let's look at Mindy Kaling's Is Everyone Hanging Out Without Me?, a solid comparison for Lena Dunham. Kaling's book has sold (using BookScan as a starting point), about 130,000-150,000 in hardcover and about 15,000 paperbacks in just three weeks (very strong chance it eventually sells over 100,000 paperbacks). Based on that revenue model, Kaling's book has earned her publisher approximately:
While earning Kaling herself:

And that's without further paperback sales, ebook sales, audio sales, all that good stuff. Obviously Random House thinks Dunham's book can outsell Mindy Kaling's... but it doesn't need to get to the magical Tina Fey/David Sedaris sales stratosphere to make a lot of money. If the book sells well, and you double those sales numbers I mentioned, Random House will make millions... and yet Dunham will still not have earned out.

So take everything you think you know about "earning out" and simply throw it out. There's a reason publishers can pay huge advances to authors without ever expecting them to earn out: it's because even if the author never makes another cent beyond their advance, the publisher stands to make a whole lot more. Oh, and Forbes? I'm waiting for the offer to come on staff.

Jason Pinter is the Senior Marketing Manager for Grove/Atlantic and Mysterious Press, as well as the bestselling author of five thrillers (the most recent of which are The Fury and The Darkness), as well as the ebook exclusive FAKING LIFE, which have nearly 1.5 million copies in print in nearly 20 countries. His first novel for young readers, Zeke Bartholomew: Superspy!, was published in November 2011. Visit him at www.jasonpinter.com or follow him on Twitter.