03/18/2010 05:12 am ET | Updated May 25, 2011

Publishing's Next Big Thing and Its Next Big Headache, Part I

A contractual problem threatens the ebook business of all the major publishers.

It begins with the next big thing in book publishing: advertising.

Have you used any free iPhone apps that generate revenue for their creators by running small ads above or below the apps' primary content?

Have you seen photos of the Barnes & Noble Nook ereader, with its second, independent display that's capable of showing advertisements?

A reader spends a lot of time with a book. Ads will have time to sink in. That makes the medium valuable. Google isn't getting into the book business for charity.

But before book publishers can enjoy ad revenue, they need to solve a big problem:

Most modern publishing contracts state that publishers may not sell advertising with their books.

That restriction appeared in the early 1970s, when cigarette companies started an intense program of buying insert ads in paperbacks. (Lorillard Tobacco, which may have been the first, began its program in August 1971 with 12 million inserts spread over 156 titles.)

Authors objected. In time, advertising restrictions became standard clauses in publishing contracts.

Publishers who stick to that promise will have to walk away from revenue. They might have to limit the platforms and apps they support. They'd certainly lose sales to ebooks that are supported by advertising. Those other books will be priced low or given away to attract more readers for the advertiser.

Publishers and authors will have to negotiate a solution.

That may not work well for the publishers. With a reputable publisher, the author's worst-case split of subsidiary rights is fifty-fifty. Contracts that allow advertising usually mention that figure.

That's less profitable for a publisher than the current revenue split of ebook revenue, which is closer to 75/25 in the publisher's favor.

Worse for publishers, a fifty-fifty split will be a dream when they sit with the agents of their top authors. Publishers will have to offer better, or they can forget about new books from those authors.

No matter the final split, this will be a big headache for some publishers.

And there's a kicker.

It's possible that no matter what deal is struck, some publishers won't be able to hold up their end of it.

The reason for that, and the possible consequences for some of the larger publishers, is coming in Part II.