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
For the eBook, I chose the wide distribution approach rather
than listing it only with Amazon. I figured most new readers would come to the
republication of Bad Policy having
read Ant Farm (Kindle only) or
through a promotion targeted to Kindle readers. Doubtful Relations, however, follows Cabin Fever, which is available from Barking Rain Press in all
formats. People who enjoyed Cabin Fever
will likely prefer to read it in whatever format they chose previously (about
15% of eBook royalties weren’t from Amazon). I can change to a Kindle-only
strategy sometime in the future to pick up Kindle Unlimited readers, but I
don’t want to lose the Nook, Kobo, and iBook readers to the series.
