So I took the liberty of emailing a few small presses that use the profit-sharing and royalty-only models that have been all the rage recently, to see what they have to say on the subject. Jolly Fish Press was very courteous and quick in their response, so here's what they have to say about things.
On why small presses use profit-sharing:
The profit-sharing model works for most small presses because it does not incur debt. as such, the author is more motivated to promote the sale of his book. From the business side of things, it creates a partnership of two parties--the publisher who places the initial investment in the publication and distribution of the book, and the author who writes the book and is responsible for its sales and marketing. The selling of his book now becomes the author's business as well.The no-debt idea absolutely makes sense, from a business perspective. As I've mentioned before, it's all about ROI. Motivating the author to be more involved in marketing can be a good thing as well--in my opinion, there's no reason an author shouldn't be doing all he or she can to connect with readers. (There's also an argument--one that I happen to generally agree with--to be had regarding what an author should or shouldn't have to spend his/her time doing, but I'll save that for another day.)
That said, one of my big worries is the investment of the publisher in the writer. Because, let's be honest, ROI isn't irrelevant for the writer, either. And by writing an entire novel, the writer has already invested a lot. That's where an advance is really nice; it shows the writer that the publisher has some investment in the work the writer has already done.
In the email I received, JFP went on to describe the nature of advances. Mainly: authors don't earn royalties until advances are paid out, and authors that don't sell more than their advance often don't get contracted with the same publisher again (and, by association, often get "blacklisted" and have a very difficult time getting contracted anywhere after such a debacle). (That's all paraphrasing and summary of what was stated in the email.)
These concepts are pretty accurate, and have long constituted some of the inherent risks involved in publishing. Here's the rub: what risks is the author more inclined to take: having to split his/her time between writing and marketing and dealing with a publisher who has marginal investment in his'her work, or not paying out their advance and potentially being "blacklisted" from major publishing houses? I think the ultimate decision should really depend on the author's personality, goals, and strengths.
One more interesting thing JFP mentioned:
JFP does not pay advances for the same reason explained above [referring to the inherent risks they mentioned, and that I previously summarized, in the advance model]. Our current royalty scheme is structured on a tiered platform; the royalty increases as book sales increase. While each book deal comes with its own unique terms and conditions, our genreal royalty payout is based on the cost price of the book, starting from 8%. As a traditional publisher, JFP absorbs the publication costs of the book.Hmmm. Now, that is interesting, particularly the fact that they start out at 8% royalty (as opposed to the 50% many other small presses toute). I'm not sure if this is strictly for print books, or for all books in general. From what I understand, JFP presents itself as, essentially, a "traditional publisher without the advance" (my quotations, not theirs). So they're offering a traditional royalty rate where the royalties go straight to the author from book one, but there is no advance involved. The tiered royalty scheme sounds interesting, but again sounds like a lack of investment on the publisher's part. Anyway, I've emailed them to ask for clarification on this system, and I'll of course post my findings here.
For me, personally, I'm still leaning towards the traditional publishing route, advances and all. That said, I'm still open to whatever comes my way, from small presses or otherwise.
For what it's worth, the people at JFP seem like a smart and courteous bunch. Far more importantly, they don't seem like they're trying to screw the author over. The fact that they at least "absorb the publication costs" is certainly a step above what Hydra was reportedly doing by pushing those costs onto the author. So, good for JFP. I commend them to you, if you're looking for a royalty-only publisher.
Also, it appears John Scalzi beat me to the punch yet again, and posted this alternative perspective by Evan Gregory, from the Ethan Ellenberg agency, on the royalty-only model. Check that out for an additional additional perspective.