Whither Subscription eBook Services?

Jim Jackson’s thoughts presented below do not represent any official WWK position. This week marked the announcement that the eBook subscription service Oyster will be shutting down in early 2016. This summer, Entitle—one of the original three eBook subscription services—quietly closed its doors. Scribd, the third of the group, had to backpedal from its promise of “unlimited” books per month to throttle the usage of its romance readers. Since the original three commenced operations, Amazon entered the market with its Kindle Unlimited. Google has hired the folks from Oyster and so is presumably considering a subscription service as part of its Google Play.

So the field is changing and Amazon plays a big role. But, are subscription eBook services sustainable?

The Economics of a Subscription service

The basic business equation still holds: Revenues – Expenses = Profit

Revenue

In a standalone subscription service, revenue comes primarily from the monthly fees users pay to enjoy the service. Kindle Unlimited charges $9.99 a month. Oyster charges $9.95 and Scribd charges $8.99. Multiply the monthly fee by the number of subscribers and you have revenue. Unless you can sell ads along the way, or sell your subscription list, or monetize something else, that’s your revenue. To keep things simple, we’ll assume revenues consist solely of subscriber fees.

Expenses:

To operate, the business has to have a website designed to collect memberships, present a searchable catalog, record and deliver selections. While there are some variable costs involved in a subscription service, most of these operating expenses are fixed costs. One subscriber or a million they will occur, so it is important to grow your subscriber base quickly so the expenses decline as a percentage of revenue.

The second major expense are the acquisition costs. Publishers (and authors) want to be paid if someone reads their book.

Subscription services must negotiate with publishers, distributors and, in Amazon’s case, indie authors, concerning their compensation. Oyster and Scribd generally paid publishers something very close to what the publisher would earn by selling the book through an online retailer.

Under the Oyster/Scribd model these are variable costs. The more books lent out, the larger the expense. The more expensive book lent out, the larger the expense. We’ll discuss Amazon’s model in a bit.

Who would buy an eBook subscription?

For a reader the equation to calculate savings from a subscription service is:

Subscription Fee – [(Number of Books I think I’ll read in a month) X (average cost of book)]

Let’s say the average cost of eBooks purchased without the subscription is $2.99. The reader is a winner at 4 books a month (3 Scribd), loser at three (2 Scribd) or fewer. If the average cost drops to $1.99, then it takes six (five Scribd) eBooks to “win.” At $5.00 it only takes two books to be ahead.

Strategies Suggested by the Profit Equation

(1) Feature less expensive books. Free are best. $0.99 are very good. $1.99 good, $2.99 okay and anything more is pricey.

Look at the subscription catalogues and you’ll find they are crammed with “classics” that happen to be out of copyright (and therefore virtually free to the service)

You will see a very limited number of current, higher-priced books from the Big 5 Publishers. They are simply too expensive. I suspect those that are in their catalog provide the publisher with much lower royalty rates—the eBook equivalent to mass-marketing to Walmart or Costco.

(2) Pray people do not read too much.

Consider the profit formula and how it applies to fitness center memberships. In January in the flush of New Years’ promises, lots of people make the basic calculation that they will win by purchasing a yearly membership. And then by the end of January many stop going. These are gravy memberships. Revenue exists, but no variable expenses. That overestimating consumption phenomena may happen for book readers as well, but unlike the gym membership, they probably will not give up reading books entirely. Even if they have an off month or two, the only bar preventing them from restarting to read a lot again is finding time. For a gym membership there’s a psychological barrier of anticipating the physical pain necessary to get back in shape and the physical barrier once the individual actually restarts.

Subscription services try to limit reading by not providing all the books the subscriber would normally like to read. New best sellers are rarely offered because they will cost the subscription service too much. If people spend time reading those in paper form instead, it saves the service money and cuts down on the total books read on the subscription.

When people read a lot, the subscription service loses money. Scribd found itself in that situation this summer regarding their romance readers. Since they could not limit the number of books selected by romance readers, and they were not willing to increase the subscription price, they cut the number of romance novels available in the service. Drastically cut. They kept the freebies and eliminated the expensive books. Some of those in between remained. Smashwords estimates Scribd cut 80-90% of Smashwords romance titles.

(3) Pay publishers and authors smaller fees. With limited exceptions, Kindle Unlimited (KU) does not offer Big 5 Publisher books. Its offering is largely populated by its own imprints and indie author publications.

For indie authors, Amazon creates a pool of money—it determines the size—and allocates that pool to authors based on the number of pages read. Their previous practice had been to allocate the pool based on number of “downloads.” They found this encouraged gaming of the system whereby authors would split a book into four parts, so a 200-page book becomes four 50-page books, earning four times the income for the author.

Note that Amazon determines the pool size, which from an author’s perspective means Amazon determines the per page revenue. The indie author’s choice is to join the program or not. For the first month of this new payment system’s operation, July 2015, KU paid $0.005779 per page. For a 300-page novel that means $1.73. For August the payment per page dropped 11% to $0.00514, and the same fully read 300-page book would earn the author only $1.54.

Notice that if that 300-page book were priced at the low end of Amazon’s preferred range of $2.99 to $9.99, the royalty for a book purchased would be about $2.09.

Amazon has structured a model where the author subsidizes the subscription service. I’m sure Amazon will argue that the author will make it up in volume, but how can you know, and what is to prevent Amazon from settling on a much lower rate in the future, say $0.001 per page so our 300-page book now earns the author a paltry $0.30?

Alternatives

The Scribd model as currently constructed does not hold economic water. It is too easy for subscribers to determine if they are saving money or not on the service. There will be a small percentage of subscribers who are losing money by participating and are insufficiently motivated to stop their subscription, but they can’t make up for the costs of heavy users.

Amazon can control its costs by defining how much it reimburses indie authors, a large percentage of the KU offerings.

But consider Amazon’s approach to the Audible subscription service. It has a fixed monthly fee, but for that price you get one “free” audio book. The rest of the catalog is discounted. As long as the consumer was going to purchase at least one audio book a month, the customer is “ahead.” Amazon’s costs for additional downloads are offset by additional revenues. Although the audio books are discounted, I’m betting those lowered costs cover the royalty payments plus profit.

Scribd could move to a similar model for books. Say, you get four a month for free. The rest you can have for a discounted fee.

If Google Play (or Apple for that matter) decides to enter the business, they will bring deep pockets. They don’t yet have the indie author network as Amazon does. But what would happen if they offered better royalties than Amazon? It could prove interesting, yes indeed.

~ Jim