Recently the whole "authors won't get paid for ebooks" thing has bubbled up on teh Intertubes again. And in the process we are shown (yet again) that some people are living in cloud cuckoo land. So let me first of all put down a few facts - mostly unpleasant - and then after that I'll try and show that there is still no need to despair.
The nasty facts
Ebooks aren't going away and will gradually take a majority of the reading market.
Booklegging isn't going away either and in fact is never ever going to go away because there is no way to turn back the clock
DRM is absolutely not the answer
The well understood pre-ebook business model is dead.
Most publishers (and sadly a number of authors) are going to go bust by doing things wrong
So are a lot of bookshops and so may current online leaders like Amazon
The barrier to entry has collapsed.
The barrier to financial success just got much higher
Some of this is pretty obvious. ebooks are here to stay because people are becoming ever more used to reading on screens - younger people especially - and with increased battery life and screen quality the reasons to prefer paper are disappearing (not gone - but reduced so that the trade-off between the two formats is more equal). Since ebooks and electronic reading are here to stay it should go without saying (but apparently needs repeating) that it is going to be ever easier to bookleg books. Since, in order to read an ebook, it has to be displayed on a screen DRM is doomed to failure.
[Aside: one guaranteed way to de-DRM any ebook is to hold it up to a webcam or digital camera and take a picture of every page - there is no way to block this and the trick is not exactly new, it was neatly illustrated in a security context by Lois M Bujold in The Vor Game (1990)]
Separately the traditional publishing distribution chain is toast. It has been on life support for at least a decade as various parts of the distribution chain have confused books with breakfast cereal and attempted to sell the former with logistics, marketing and sales methods developed for the latter. This essay talks about music but it absolutely applies to books too. If the retail presentation of books is like that of soap powder then is it any wonder that would-be readers are confused? And confused prospective customers rarely turn into actual paying ones.
The death of the traditional print business model was merely hastened by Amazon. The seeds of its destruction had already been laid by the earlier adoption of the grocery business model, however Amazon helped speed up the death spiral. Not that this is going to help Amazon much in the longer term. The problem for Amazon is that while the web helped them take sales from existing bricks and mortar stores because of larger inventory and lower prices, their success is gradually killing these stores. If (when?) the bricks and mortar stores go away then so does the casual reader base that buys bestsellers and takes an occasional chance at something else when browsing in an airport bookstore. These folks are the ones whose purchases support publishers and thus, eventually, the industry as a whole. Hence Amazon's gain at the expense of the bookstores looks like it could be rather temporary. Unless of course we can replace that casual treeware reader base with a casual electronic reader base....
This looks like it could be promising except that the models for online book sales don't seem to be well developed. In trying different ones I have no doubt that people will make mistakes and making mistakes is likely to be fatal for companies that make too many of them. On the other hand not making any attempt is also certain to be fatal and the publishers (and Amazon, B&N etc.) are well aware of that.
But there's another problem. The barrier to entry for a new author/publisher/distributor is now much much lower. Services such as Lulu (or CreateSpace - Amazon's equivalent) make it trivial to offer books printed on demand. Offering ebooks is even easier, all it takes is a website and paypal to do it yourself and of course Amazon and many others will cheerfully rip off the aspiring author provide ebook publishing and sales channels too.
On the other hand, the number of authors who can make a real genuine living out of the craft is small (it always has been) and shrinking because on the whole individual titles are selling less and royalties/advances are not increasing in line with inflation. Combine this with the aforementioned thing about the barriers to entry being lower and it becomes obvious that authors have to do even more than they used to in terms of marketing themselves and their books. In the non-fiction area it is clear that it really helps a would-be author if she can bring a (large) bunch of potential readers to the publisher before the book is even written. To some extent this is true in fiction as well (not as direct but it certainly doesn't hurt if an author has a loyal fan base) and this tends to make it really hard for adequate midlist authors to make the jump to bestsellerdom. Obviously nothing is predictable (if it were no publishing house would print anything other than bestsellers) but as a general rule the catch 22 of needing a large fanbase to become a bestseller and getting a large fanbase from being a bestseller is getting more and more vicious.
Finally having gone over all the bad points I think I should point out that there is no turning the clock back. People who dream of some past golden age when lots of authors could live from their career and where they didn't have to market themselves beyond some nice "all expenses paid" leisurely book tour are living in fantasyland. Unless a miracle occurs the total volume of books read is going to stay fairly steady while the numbers of titles on offer is going to keep on growing fast.
The numbers - what writers can expect today
I think we need to look at just how bad things are now in reality. This should help set expectations for the "hope" section. Note that I'm looking at the figures for run of the mill authors, of which there are hundreds, rather than the few dozen bestsellers.
Short fiction pays around $0.05-$0.15/word and most places that accept short fiction either cut the rate when the story gets too long or just reject over long stories. A 10,000 word story at $0.10/word pays the author $1000. There are occasional exceptions to this but I would say that $1000/story is a pretty good rule of thumb. If you want to make a living out of short fiction you need to sell 3 or 4 stories a month which means writing one pretty much every week. Unfortunately even if you can write one a week you probably can't sell them all unless you can write under a dozen pseudonyms in three or more different genres.
Short fiction is bad but novel length writing is not necessarily much better. A typical new author/midlist author will get an advance for a book of around $10,000 (this is an order of magnitude thing - the advance could be $5000 it could be $20,000 but it isn't $1000 and it isn't $100,000). Assuming the book earns out but only just an author would need to sell two or three of these a year to make a living out of writing - and if his advances are at the low end by make a living I mean make something slightly more than a part time worker on minimum wage (20 hours a week, 50 weeks a year @$10/hour = $10,000). This by the way is almost exactly the situation of Elizabeth Bear (and it should be noted that I'm ignoring the agent's 15% cut in this analysis).
In order for the author to earn out his advance the book will need to sell between 5,000 and 10,000 copies in hardcover and perhaps 30,000-50,000 in mass market paperback (these numbers are orders of magnitude ballparks not set in stone). For a hardcover the author gets about $1.50/copy so the book needs to sell 6666 copies to earn my notional $10,000 advance. Typically a hardcover print run is about 10,000 so that means the sell through needs to be 66% which is good but not astronomical. My recollection is that sell through these days is generally around 50% but that it varies significantly. I think it is fair to say that assuming our author continues to get contracts he'll get sufficent sell through to make the print run break even whether or not that equates to 50%, 66% or 90%. But note the total number of actual sales here: 6666. Trade paperbacks are priced about 2/3rds of HC and mass-market paperbacks about 1/3rd and (not terribly surprisingly) the royalty rates, amount of books that need to be sold etc. are proportional. But lets make it clear here even going on mmpb volumes the total number of books sold to actual customers is likely to be around 25,000 for a successful book. Tobias Buckell (he gives numbers in his long post about Amazon and ebooks) is another author right in this category. He has books that have sold thousands - some are in five figures but not all - and he seems to count as moderately successful.
Critically we also know that publishers rarely reprint even when sell through is very high because they don't want to take the risk that the reprint fails to achieve adequately fast returns. Hence the book then goes out of print real soon and never, ever gets a chance to catch on later. Lois M Bujold wrote an essay about the mechanics of publishing a decade ago - and things have only got worse since - that explains why this happens.
So to wrap up the numbers, if we are to keep authors reasonably happy then midlist writers need to get about $10,000 per novel and ideally $2000 per short story. And for printed books this means there needs to be a solid core of around 10,000 readers (less for HC more for mmpb). Moreover we also know that unless the book sells out almost immediately the 10,000 readers who buy it initially are the only readers that book ever gets. As noted at the beginning there are the obvious exceptions - the bestsellers are a whole different ballgame because they get to shift hundreds of thousands of copies of their books and get paid enough that they can live on one book a year or less. But there aren't many of them. There are also those people who get to write just one (or two) bestsellers and never sell another word. We ignore them too.
How to pay a writer
Our target here is to give a writer an income of (about) $30,000 a year based on her getting an initial $10,000 a novel and $2000 a short story. This means our author needs to write 2-3 novels and a half dozen short stories per year. This is not easy but it is also far from impossible as many writers do indeed write this much.
[Ideally we'd like to see things get better so that the income for a single novel would hit $30,000 and the income for a short story hit $5000 but that's a future wish not a "must have" now target.]
What we also know is that currently ebook sales per title tend to be in the hundreds and that while this number is going up it isn't yet at even hardcover sales numbers. Mind you not all ebooks are equal. Baen is, I think, the obvious outlier here - my understanding is that webscriptions sells around 3000 monthly bundles and that some bundles, and some individual books/eARCS, sell more than that. But Baen books are significantly cheaper than most ebooks (as in half price or less). Putting that together I'm guessing there are probably at least 1000 people willing to pay $5 or so for any decent (i.e. properly edited/proofread/formatted etc.) ebook and a smaller number willing to pay more.
If 1000 people paid $5 for an ebook and the author got all of it then we'd be half way to the $10000 total. Now as it happens we know from various crowd funding efforts (e.g. Save the Dragons, the Liaden Fledgling/Saltation drafts) that under the right circumstances people will pay $25 or more for an ebook - a handful will actually pay $100 or more. You typically have to offer them something extra - the book in hardcover when released say - but, as the Baen's Universe tuckerization trick showed, what you offer need not be a physical good. If we have 200 people paying $25 because they want to be named or something and 1000 paying $5 then our ebook has just met our target of $10000 assuming all money goes to the author.
That would seem to be excessively generous of our ebook publisher, but there are ways around this.
How about considering the example of the Baen eARC trick ($15 for a pre-release version) and look to add in some variable pricing. Say the book costs $15 for the first 2 weeks, $10 for the next 6 weeks and then $5. The poor will hold out until it costs $5 but the keen (and richer) fans will pay $10 of $15.
If we get a split of 100 @ 15, 250 @ $10 and the rest (650) at $5 and we give the publisher an Apple like 30% then the author gets 0.7*(100*15+250*10+650*5) = $5,075
So assume that we have a group of 200 "Patrons" who get tuckerized, get signed bookmark/bookplates from the author and the like and who contribute - on average - $30 per ebook for those privileges (and because they like the author) and who, as part of that get the ebook at the same time as the $15 folks - with the same publisher 30% of $15 = $4.50 knocked off - then we get to $51'' again slightly over the $5000 target.
A total of 1200 people paying a mix of amounts from $5 to (say) $75 for the ulitmate redshirt level will pay our author $10175 a book. They will also have given the publisher $3075 which probably isn't a profit but would certainly pay for basic formatting, webhosting etc. We might recall the 1200 people is somewhere under 20% of the break even point for readers of hardcover books but yet our author is already getting money up at the midlist author advance level of payment.
Anything else we get is gravy and in order to get that gravy we need to grow the market. So we start with offers e.g. after a year get the book for $2 as long as you also buy another newer book by the same author and then as eventually (say after three years) put it out for free as marketing but allow donations and so on.
And we note that at this point adding (say) POD using lulu.com and bundles were you get both the ebook and the lulu POD for $20 and the entire hardcover readership (6000+) could potentially be paying our author something like an average of $2-$3/copy instead of the current $1.50. This is how we start making authors richer which is the long term goal
The only problem with this model is that in general, current publishers and distributors are not going to be willing to settle for anything like their part of these numbers. But if the current lot continue to commit market suicide the way they seem to be now this may not be so much of a problem because some new entrants will take their place and choose a model like this.