The Shatzkin Files


Penguin Random House does its competitors a favor by walking away from subscription


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I sometimes feel like I’m the only guy in town (NYC, but I’d include London too) contemplating out loud how Penguin Random House might use its position as by far the biggest commercial trade publisher to make life a bit more difficult for its competitors, which in the first instance means the Following Four: HarperCollins (which is much bigger than the other three), Simon & Schuster, Hachette, and Macmillan.

What I mean, of course, is that PRH could use its position to either improve its margins in relation to everybody else or to create proprietary distribution. Either way, it would expand its ability to make money on books, fueling further its ability to outbid rivals for attractive properties. That’s why, when I looked at the Amazon agreement with Hachette and Simon & Schuster and the story of those negotiations, I thought first about whether they would tempt PRH to push for a better deal with Amazon than its rivals got.

The two most “obvious” opportunities for them to me, one of which appears to be anything but obvious to the people running PRH, are to build PRH-only general bookstores inside other retailers using VMI (vendor-managed inventory) and to start a PRH-only subscription service. They’ve never commented so I could hear it on my suggestion of the former; they continue to make it abundantly clear that they don’t share my opinion about the latter.

A NY-based executive of PRH told me a year ago that I had the subscription thing all wrong. From PRH’s perspective, it is unwise to offer a service and pricing plan that seems designed to give substantial discounts to your very best customers: those who buy and read many books. This is not a crazy perspective. If PRH sells about half the commercial books, then, on average, they get half the sales from these heavy book readers. Why would they want to help them reduce their book spending?

Last week, Tom Weldon, the CEO of PRH in the UK, issued an emphatic dismissal of the subscription idea. Weldon was speaking with Bookseller editor Philip Jones at the British digital publishing event, Futurebook. And The Bookseller reported it.

Weldon said: “We have two problems with subscription. We are not convinced it is what readers want. ‘Eat everything you can’ isn’t a reader’s mindset. In music or film you might want 10,000 songs or films, but I don’t think you want 10,000 books.”

Weldon also said the company did not “understand the business model”, and who made money. But he acknowledged that subscription could work “in certain markets around the world in emerging economies where access to books and bookshops is extremely limited”.

Nobody has more respect for the intellect and professionalism throughout Penguin Random House than I do, and that certainly includes Tom Weldon, whom I had the opportunity to meet once over a business lunch. But in this case, and assuming (as I do) that Weldon is speaking for his colleagues as well as himself, they seem just about 100 percent wrong. (And, of course, it is obvious that there are people in the home office at Bertelsmann who also don’t agree with him, since they power the German ebook subscription service, Skoobe.)

Weldon is absolutely right that the consumer case for a reading subscription is not as powerful as it is for subscriptions to music or video. Particularly when comparing with music, the point that having access to many thousands of choices all the time is not nearly as valuable for books is totally correct.

But making the leap from that that “it is not what readers want” is a totally unproductive generalization. SOME readers want it, and Oyster, Scribd, and Amazon (as well as 24Symbols, Bookmate, and others) are signing them up. The Oyster and Scribd subscribers will have HarperCollins and Simon & Schuster books to choose from but none from PRH. It won’t take a data scientist to prove that PRH will lose market share among those readers to competitors.

Perhaps Oyster and Scribd will fail. Is PRH essentially predicting that? Is PRH counting on that? Are they assuming that’s what will happen? It would certainly seem from the combination of their non-participation and Weldon’s remarks that they are. (Of course, it is also possible that Harper and S&S also think the subscription services will fail, but they don’t mind getting some revenue for themselves and their authors in the meantime.)

But it is the second objection that is most mystifying. Weldon is saying he doesn’t get the business model, which reinforces the idea that he doesn’t believe in it and expects the big subscription services to fail. But that is not an explanation for why Random House wouldn’t do this themselves. By definition, if a publisher starts a subscription offering for its own books, it is not the same business model as a third party offering it. There is one fewer entity feeding at the same trough. Oyster has to make enough money for themselves and for the publishers and authors whose works they peddle. Random House would only have to make sure their authors were whole, or maybe a little better than whole, and they could keep the rest.

Cutting out the intermediary supply chain, there’s a lot of vig in there for PRH to be able to give consumers a reason to subscribe to a service that provides only PRH books without costing authors a penny.

The joker in the deck, of course, which Oyster and Scribd would only be too glad to point out, is the customer acquisition cost. But even if PRH didn’t want to recruit subscribers for such a service by promoting it on the books themselves — certainly the most efficient and direct way to reach their customers — out of concern for how it would be received by the retailers selling their books, it has all sorts of ways to get the word out about what should be a bargain for many of their readers. Penguin Random House has been building its database for direct customer contact for years. It can reach literally millions of readers virtually free, and in many cases would know the names of their favorite authors which is nice ammo for the subject line of an email to get it opened and read. And it also has millions of page views through author sites, both those PRH controls and those where an author could be recruited to help.

And unlike the other services. PRH wouldn’t have to maintain a whole apparatus to make deals to bring in the content; they’re already doing that! Presuming they could make the right white label deal to manage the subscription service, they wouldn’t really have a “critical mass” issue either. And instead of being on the outside looking in as the extant subscription services sign up readers they could only get access to by putting their books into somebody else’s proprietary platform, they’d be building their own unique distribution that nobody else would have.

And, frankly, a service offering all of Penguin Random House’s books, whether they put in the new ones or not, would deliver a selection at least comparable and perhaps superior to any existing subscription service.

Why they’d simply dismiss this idea is very hard to understand.

Reading tea leaves, I have gotten the impression that PRH is preparing a licensing program to make its content available for use in schools, another very disruptive thing they could do by themselves that could only be effective for their competitors in combination with each other somehow. Maybe my tea leaf reading is wrong; we’ll see if that comes down the pike in the coming months or not. Of course, this kind of subscription licensing is completely different, and they could well believe that the customers do want this and that the business model makes sense.

It has seemed to me for some time that all of the Big Five houses could peddle a subscription service for kids ebooks that would be a reliable generator of cash flow and customer acquisition as well. Many parents would love to be able to let their young kids take the iPad in hand and “buy” books, as long as they weren’t actually spending any money. The big houses all have extensive juvie publishing programs. Each one could offer a subscription service that would keep many kids amused for months. It could be a “totally cool” 6th (or 5th or 8th) birthday present. While it is true that there are others competing for the kids’ market, any of the Big Five could pull something like this together very inexpensively and, over time, build a customer base that would be both proprietary and lucrative.

With the number of ebook subscription services for consumers proliferating, surely the tech to try this out on a smaller scale is getting cheaper and more accessible. In fact, if Weldon is right, and the subscription business model is wrong, then maybe even Oyster or Scribd will want to build a service provision model into their next pivot. And if they succeed, imitators in many ways will follow.

Subscription is here as a tool to sell ebooks that any publisher totally ignores at its peril. And whether it ultimately becomes a significant channel for general trade ebooks or not, it will be tried in many forms and many ebooks will be moved that way in the years to come.

We have a great panel discussion on subscriptions at Digital Book World, Jan 14-15, 2015. It will be moderated by Ted Hill, who co-authored a BISG study on subscriptions earlier in 2014 that is looking increasingly prescient. Ted will have both Oyster and Scribd on the panel along with two publishers providing them with books, Simon & Schuster and Kensington. Kensington, being a non-agency publisher with no choice in the matter, is also a provider to Amazon’s Kindle Unlimited. The discussion will be prefaced by a quick presentation from Nielsen’s Jonathan Stolper around what Bookscan has learned about the reading patterns in subscription services. This should be a very informative discussion.

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  • Ted Weinstein

    Mike – Do the math. If your best customers buy
    2-4 books a month at $9.99 retail, that means $14-28 to the publisher (under
    Agency/30% sales commission). Of what possible benefit is offering a $9.99
    all-you-can-read subscription service. For heavier readers the math is even
    worse.

    • We can “do the math” but we actually don’t know the component numbers. And what’s the math on readers who are shopping exclusively from a selection that doesn’t include your books?

      • Ted Weinstein

        What do you mean by “component numbers”? As Tom said, what’s the point to taking less money (see my math above) from your highest-paying customers.

      • You are positing how many books would be read. But you don’t KNOW what those numbers will be in reality. If your examples are typical, Oyster and Scribd will be dead very quickly. I suspect what you posit as “typical” is actually “unusual”. And your highest-paying customers may not remain so if they have lower-cost choices.

      • Ted Weinstein

        What’s the AFFIRMATIVE and SUSTAINABLE mathematical case for a major publisher putting all their general interest books into such a service? Why is Tom wrong? What math would you show him to try to persuade him to invest in such a PRH offering?

      • Who said any publisher should put “all their books” into “such a service”?
        If I were PRH, I am not sure I’d participate in Oyster or Scribd, although if their economics are as dire as you seem to think there would be little reason not to. They’d go out of business having given you some of their money instead of NOT having given you some of their money!

        But what’s the downside of starting a subscription service of your own, where you control the economics? Subscription does not have to be at any particular price point, or “all you can eat”, or including any particular books.

        There are clearly SOME readers who want to buy books that way. There would definitely seem to be a downside to excluding all of them from your plan to capture sales.

      • Ted Weinstein

        Of COURSE there are readers who want to buy books at what is effectively a steep discount. And I want a monthly subscription service for all-I-can-drink artisanal coffee at my local cafe for the price of one or two cups of coffee. That doesn’t mean the cafe benefits by offering it.

      • You are making the assumption that you know the single reason why anybody would subscribe to this kind of service *and *that each user would accurately predict their own behavior. It’s an assumption, not a fact. And you are further making the assumption that there is no model by which PRH could get customers to routinely buy directly from them, for which some sort of subscription-like offering would be a cat’s paw. Seems to me like you and Tom Weldon are writing off a lot of potential business without much information and without the remotest attempt to confirm that what you think might be true actually *is *true.

        And, again, if PRH really were sure that what you are saying is right, why WOULDN’T they put their books into Oyster and Scribd and get some money out of it before it goes away? To ME, the downside would be that they’d *succeed*. Keeping your books out is only a good strategy if you think they’d build a captive audience with your help. If they’re doomed, why not get some of the money?

      • Ted Weinstein

        I stand with Tom.

      • Angelique Okita

        I don’t know much about the publishers or anything, but I’m an avid reader. Now with that being said I have over 350 books I have in my wish list on Amazon that I want. I have been building this list since 2011. One reason there is so many is because I have decided to buy cheaper books and I decided to borrow from the library. So technically that is lost revenue that the big 5 did not get of my money. If publishers had a subscription they would than had something from me. I of course can’t speak for everyone, but I beat many people are in a similar position.

        I just signed up for a subscription with Oyster. It appeared they were not necessarily the newest books they did have some new books, but at the same time it had books I wanted to read. There are so many books out there that have not “seen” a self in a long time, but are still excellent books and still have some kind of “value” that publishers are probably not reaping much on. I think the publishers putting a subscription together would be great. They could put books that are older and not bought all that often, plus of course put newer ones. Many books now days are series. So you put a couple of the series in the subscription and get a person hooked and that would generate revenue. I have more then once got a book that was $0 on Amazon and got hooked and bought the rest.

        This of course is just my opinion and have no real facts or data except my own experiences.

  • InklingBooks

    Quote: “Why they’d simply dismiss this idea is very hard to understand.”

    Be very careful there. I seem to recall Steve Jobs dismissing ideas that Apple later took up in a big way. It’s called misdirection and it’s great for putting competitors off guard, particularly if you’ve got a new scheme that, when it comes out, will leave those competitors flat-footed.

    For me, I suspect the future of ebook subscriptions lies in the packaging:

    1. Combined with a Netflix-like movie service to offer entertainment for one monthly fee.

    Long ago, I recall reading someone who said that after WWII railroads made the mistake of thinking they were still in the passenger business and were left hurting when people deserted trains for cars and planes. What they should have realized, the article said, was that they were in the transportation business and shifted exclusively to heavy freight, which they eventually did.

    2. A family package with age-appropriate accounts for kids. Even parents who read little themselves want their kids to read.

    One final note: What publishers large and small is a website that includes all in-print books and links to where they can be obtained. That’d break Amazon dominance of where people go with they first look for a book or ebook.

    • Well, I guess I disagree a LOT.

      1. My take on the “railroads didn’t know they were in the transportation business” meme is “bullpucky”. Running a railroad doesn’t qualify you to run an airline or a bus service. And they were ALWAYS in the freight business.

      2. Publishers will NEVER be “top of the funnel” for book search. They should have great book pages with links to every place to buy, but they will NEVER be the first place any consumer looks.

      3. Combining books with other media is not a winning combination. Many people consume one kind of media much more than another.

      As for “being careful”, I don’t think I need to be. PRH won’t do ME any harm if they change their mind and go to subscription (or even if they’re being disingenuous and intend to do it already.)

      • rickchapman

        +++ Publishers will NEVER be “top of the funnel” for book search. They should have great book pages with links to every place to buy, but they will NEVER be the first place any consumer looks. +++

        Do you think they could cooperate to create a purchasing back end a la Amazon? An industry-neutral alternative?

        rick

      • It’s called Bookish. It failed. It is now owned by Zola Books.

      • SLNH

        Mike, just because it failed once, does that mean it should never be revisited to see how to improve it and make it more attractive to the public. If comparing to Amazon, how often have they gone back to a venture they previously failed at such as dreading and Amazon marketplace.

      • I am beginning to understand Chapman’s personal frustration with you which I had previously been reading as too harsh. So, what’s your point? Your statement is obviously true, but sheds no light at all. You didn’t know it was there, you don’t know why it failed, you’re talking to somebody who DOES, you don’t accept that you’ve learned anything, and you don’t even ask a question to find out what it was, why it failed, etc. (or GOOGLE it!) so you can, even for yourself, see if any better way to do it was possible. I can assure you that Amazon did that before they tried anything twice. And I guarantee you that the number of things that DIDN’T get tried twice far outnumber the things that did.

      • SLNH

        I did know it was there. I did know it failed. No I do not know why it failed but I asked a general question about whether it was possible to revisit and come up with a different approach. Personally I think the Indies, if they wanted would be in a better position to start a co-op and come up with a design of there own. There are thousands of them out there with experience in all walks of life, from legal, to graphic design, to programming and hundreds of occupations in Aberdeenshire might not have the sophistication of Amazon but could have a comprehensive catalogue of there titles, social media, author pages and links to where their titles can be purchased.
        As for “I guarantee you that the number of things that DIDN’T get tried twice far outnumber the things that did.” Yes that’s true. If it wasn’t essential for their goals, they would drop it. So are you saying that the publishers would rather gripe about Amazon’s power in the marketplace than to try to improve their own practices or perhaps they don’t feel the need to have their own one stop shop?

      • Too many words for not enough ideas. Take the hint.

      • rickchapman

        That seems to have been a recommendation system along the lines of Goodreads.

        I was thinking more about an E-commerce backend funded and managed on behalf of the publisher. Something equivalent, perhaps, to the SABRE system used by the airlines.

      • It was explicitly intended to be an ecommerce site, formed by Penguin (pre-PRH), Hachette, and S&S. The strategy was precisely to provide an outlet not dependent on Amazon. Yes, the marketing and recommendation element was important, but that was to be a better retailer, in the original vision. Reality intruded along the way and plans changed gradually and then suddenly (when they dumped it), but they definitely tried it and spent some serious bucks in the effort. It’s pointless. A book-dedicated retailing experience could never seriously compete with what Amazon houses within an Everything Store.

        I always applaud experimentation, and nobody wins in the long run doing only things that are slam-dunks to succeed, but this is not a problem with an obvious or simple answer. I’m pretty damn sure of that.

      • rickchapman

        Well, the SABRE system worked because it was available to everyone and company neutral. I think every major publisher as well as mid-sized and smaller ones would have to contribute to the project to make it succeed. Three was never going to cut it.

        I also don’t think they have to be as big as Amazon to be successful. There’s usually room for a serious number two player and the value of both the data and of being a counterweight to AMZ would be valuable.

        OTOH, publishers aren’t technologists. And attempts by channels to become suppliers usually fail because creating stuff requires a very different mind set from selling it.

        I do know that Amazon is not done with the publishers and that they have to seriously rethink their approach to the market and writers.

        Or not. It’s their business!

      • I don’t think what you’re proposing has any practical basis in the book business anyway, but the DoJ and Judge Cote have effectively squashed any possibility that such a joint effort among publishers will take place within our working lifetimes.

      • rickchapman

        +++ Combining books with other media is not a winning combination. Many people consume one kind of media much more than another.+++

        Hmmm. Has this been tried? Because this seems to be a interesting idea. And what about trying it by genre. If you, for instance, enjoyed a particular movie such as Gone Girl, why not create a bundle that includes a copy of the novel?

        People who want to watch Edge of Tomorrow might very well be candidates for the manga on which it’s based.

        If I saw Edge of Tomorrow for, say $2.99 or maybe as part of a monthly 5.99 rental program and I had the option to buy the matching pubs for, say, an extra $1 or $2 as part of a bundle, that sounds potentially interesting. If the extra chrome is relevant and fun, I think people might be tempted.

        rick

  • EricWelch

    I’m sure you must be familiar with the MeeGenius subscription plan for kids. It makes all their books (over 700) with special formatting and read along available. Authors get a proportional piece of the income based on the number of books they have (my wife has written and illustrated for them.) I think it makes eminently good sense for them as it provides a reasonably steady flow of capital. I was very surprised when my wife’s doctor happened to mention she had subscribed for her kids.

    Personally, I subscribe to both Scribd and Kindle Unlimited. I read and review about 125-130 books per year according to my Goodreads records, yet I find that only one to three per month of those are from the subscription services, the others being ebooks I purchased so I suspect both Scribd and KU made money off my subscriptions. I do find I check both subscriptions first before buying to see if the book that interests me is available there. Note that I read exclusively ebooks. Anecdotal to be sure, but perhaps typical.

    • Maybe I once knew about MeeGenius, but I didn’t remember if I did. Thanks for posting that.

    • Aha! It turns out that MeeGenius is booked to speak on the subscription panel we’re featuring at our Publishers Launch Kids show, which co-locates with Digital Book World and will take place on Tuesday, Jan 13, 2015. Their speaker will be Wandy Hoh.

  • I got the feeling he was referring all-you-can eat plain vanilla subscrition models (all catalogue, no consumption limits, very low price) and he was not extremely good at clarifying this. Of course a $9.99/month model doesn’t make much sense for your frontlist and bestsellers if you can capture more value by selling title by title (unbundled). He failed to specificy that the all-you-can-eat undifferentiated subscription model was uninteresting for him. But he also reasonated that 80% (to me it seems at bit too high) of sales comes from heavy readers (2+ books a months) and majority of sales come from frontlist. He also said he could see subscription working in specific areas/niches. I think he was referring to the currently popular specific subscription model that consist of a low monthly fee (below say $10) on all books and without any limits.

    I’m with you that PRH is in a unique position to exploit his inventory and capture more value that it is currently capturing by tapping into subscription models.

    Models and not model. There can be many and they might offer several of them. I don’t see why there must be one-size-fits-all subscription model only, and why the plain-vanilla one below $10/month is the one that maximize value for all publishers and all authors. (for readers the subscription models that maximized value is the free one, of course).

    In fact, there are a lot of parameters that can be fine tuned:
    Catalogue segmentation: categories/genres, audience, verticals, backlist/frontlist and so on…
    Metering: pay more or less depending of the level of services and usage
    Pricing: different price points/pricing models
    and few others I’m actually working on.

    And by running their own subscription platform they would have all the benefits you can think (margins, consumer data, reading analytics,…).

    I’m with you and I suspect also PRH is. They know what they do. Sometimes they might fail to say it properly, as it happens to any of us. Most likely a communication failure, not a failure in strategy. This is my humble opinion. Not a fact as I haven’t spoken to Tom or anyone of PRH recently on this topic.

    • Thanks for all this, Marcello. You added a lot of useful nuance.

      Yes, PRH may end up demonstrating agreement with this in the end. And everybody, including Tom Weldon, has the right to change their mind. I have certainly “evolved” my own thinking about subscriptions over time.

  • xist publishing

    I believe you’re spot on with your observations about children’s ebooks and the subscription model. I founded Xist Publishing in 2011 to bring more ebooks to ereaders (this was pre-Kindle Fire and I didn’t want to read my kids ebooks that had games imbedded.) In the last 3 years, we’ve grown our catalog to about 200 titles, most of which are illustrated picture books. Subscription services are on track to be our largest source of revenue in 2015.

    I pushed in the “early” days to get our books into libraries because as a parent myself, I knew that little kids consume lots of books and even at lower price points than print, parents would prefer to borrow along side owning. OverDrive is just now catching up with Fixed-layout epub3 and the borrow process is still quite clunky.

    On the other hand, a subscription app like EPIC!, FarFaria or Reading Rainbow gets hundreds to thousands of beautifully-formatted books instantly into kids hands. Some of the kids subscription services have content from those “following four” publishers and Scholastic’s Storia could have been a great consumer-facing subscription platform. It would make sense for the big 5 to put together their own app, but as a small publisher in the space, I hope they don’t.

    –Calee Lee, Xist Publishing

    • Thanks. Amazing how something that seems so obvious can get so little attention from the big publishers, isn’t it?