The Shatzkin Files


Subscription services for ebooks progress to becoming a real experiment


My long-held conviction that broad-based subscriptions for ebooks were not likely to work is partly based on facts that are now changing. It is still by no means a slam dunk that ebooks must go where Spotify has taken digital music and Netflix has taken the digital distribution of TV and movies, but it looks more likely today than it did six months ago. Still, looks could be deceiving.

The core of subscription economics is to pay less to the content supplier than they earn other ways to give you some headroom to create a value proposition for consumers. That’s how Spotify and Netflix work. That’s how Book-of-the-Month Club works.

And what happens over time with subscription services is that the power of “brand” passes from the individual titles (and authors) to the subscription service itself. In order to attract customers, a subscription offer depends on recognizable branded product to bring people in. But, over time, the value shifts. Eventually, a subscriber-reader can become used to choosing from what the service offers and will either not know about, skip, or accept purchasing the occasional book s/he wants outside the service if it isn’t offered inside. (A varient of this reality is playing out now in the Amazon-Hachette dispute, where Amazon’s brand power, including people who have a subscription to PRIME free freight, makes any particular publishers’ books subordinate to the seller’s brand with the consumer.)

None of this is particularly startling or insightful. Every agent for a big author knows it. Until very recently, that has meant that big publishers did not put the big books from big authors into these services. When the first shoe — the HarperCollins shoe — dropped and the second biggest trade publisher (and by far the largest of the four majors who trail Penguin Random House) went into Oyster and Scribd several months ago, I should have taken on board that the perception of agents must be changing. Now, with S&S having joined them, and with major authors included in the offerings from both companies, it is clear that agents are withdrawing their objections.

There are three reasons for this.

One is that the incumbents in the book business are circling the wagons against the dominance of book retailing’s most powerful brand: Amazon. As the market share of and customer loyalty to the industry’s biggest player grows, other dangers — such as those posed by subscription services if they mature — look relatively less onerous.

The second is that publishers and agents love the opportunity to establish that if subscription services want to “play” in publishing, they’ll have to pay for each ebook on a purchase deal. That is: the subscription services are establishing their “model”. And the publishers and authors are also establishing theirs!

The last is that the two big current subscription efforts are disdaining the fundamental economics to get their services started. The current model, as outlined by S&S CEO Carolyn Reidy in a letter to agents announcing her house’s participation, is that the service buys a copy of the book at “full price” when a “a certain threshold of reading has been surpassed for a given title”. But her letter also suggests that authors make even more money on these sales than they do on normal sales, which implies that Scribd and Oyster are paying more than 70 percent of the retail price for the privilege of using these books. (I have heard a range of numbers for where the threshhold of use to trigger payment is, from 10% to 40%, but I have no idea what it is and how it might differ among publishers.) Whether they’re paying 70% of retail or more, that means that it would take no more than two full-priced S&S or HarperCollins (assuming they have the same deal) titles a month to cost the service more than the revenue from a full-freight subscriber. And if the subscriber came through iOS, Apple’s 30% cut off the top would mean that even one major publisher ebook being read in a month will likely put the service in a deficit position.

Even when the purchase model is favorable, which this one appears not to be, it has been generally understood that the viability of a subscription model depends on what is called “breakage” or “health club economics” to succeed. They count on the expectation that relatively few subscribers will read and trigger payments on two, three, four books a month compared to many who will read one or less than one, or who will choose from among books (like public domain titles) that cost the services less or nothing.

The first of the subscription services for books — Safari — used a model that is much safer for the services because it assures cost stability, assigning a percentage of the revenue as a pool to compensate publishers rather than guaranteeing a purchase for every read as Scribd and Oyster are doing. I expect the purchase model to be very difficult, if not impossible, to sustain. But persuading the big players to come in depended on getting away from the safe “pool” model and purchasing the ebook anew for each new user.

A huge danger for the subscription services is the likelihood that subscriptions will be shared within families (let alone within dormitories!) That could drive up the average use per subscriber very quickly if it isn’t controlled.

Only now, with two of the Big Five in the game, giving the services about a third of the most commercial backlist titles in publishing, can they really find out whether the price-and-cost model they’ve set up will work to give them a profit. (It is important to note that HarperCollins and Simon & Schuster only put backlist titles into the services, so the most attractive commercial titles, which are new, are not part of the offer. This also means that all shoppers and purchasers of new titles will continue to use the stand-alone purchase model.)

I’m sure Scribd and Oyster have data and analytical skills that I don’t have. But, intuitively, this seems like a tough proposition. Subcription services are attractive to consumers because they’re bargains. If you normally read a single ebook or month or fewer, the $8.99 monthly subscription charge would not seem attractive. But if you read an ebook or two a month or more, the services will likely lose money on you.

Meanwhile, there are two players currently sitting on the sidelines that could really disrupt the subscription incumbents (which also include Spain-based 24Symbols, which has been around much longer than Scribd and Oyster but which hasn’t succeeded so far at bringing in the big publishers and the big books.)

There are rumors that Amazon is already canvassing for participants to deliver a subscription service of their own. Of course, they really already have one. Their PRIME subscription offer, for which the headline attraction is free shipping of hard goods, also includes access to the “Kindle Owners Lending Library”, which is effectively a broad-based ebook subscription service with some limitations and a far less robust title selection than Scribd and Oyster. Amazon could find ways to expand that. Will they match the implied compensation from Scribd and Oyster and pay more than the 70 percent which is the current standard for sales by agency publishers (which, therefore, becomes the basis for royalties to big authors)? One would suspect they would want something in return for that: exclusives, perhaps, or earlier access to the titles than Scribd and Oyster have.

Of course, Amazon (or Google or Kobo or Nook or Apple) would have an automatic advantage over the subscription incumbents if they decided to compete with them. Because they already sell all the books, they could sell you the books you wanted that weren’t in the service as part of a single offer.

The other future player of consequence is Penguin Random House, which by itself has well-known commercial titles that exceed in number what the services would have even if they signed up one more of the remaining big publishers. Hachette’s chief marketing and sales officer, Evan Schnittman, is quoted by the Wall Street Journal saying that this model is “not for us”. That leaves Macmillan, but even if Scribd and Oyster get them, PRH could have the most attractive title base on offer all by itself.

When I speculated some time ago about the opportunity PRH had to do this, one of their executives set me straight about why they wouldn’t. What I was told was that PRH was not thrilled by the idea of turning $500 and $1000 a year book customers into $100 a year book customers. Of course, that calculus changes for them if others are succeeding at doing that, and those new $100/year customers are then one step further removed from buying PRH books.

If PRH did this, they’d have one big decision to make: do they attempt to include the biggest titles from the rest of publishing in their offering or not. They’d already be starting with the most attractive title selection, but the Scribd and Oyster assortments would be competitive. If they went for some of the rest — even if only the top 10 percent of the rest — PRH could present a noticeably more attractive selection than Scribd or Oyster.

Would other publishers go in with them? I’d say, “probably”, because they can’t afford not to have their biggest books exposed to all possible substantial audiences, and PRH would almost certainly have the biggest subscription audience.

Would Penguin Random House want them? I’d say, “probably” again. It would stamp their offering as by far the best, and they’d still be advantaged dealing with authors because they’d be the only publisher not paying a third party to get the subscription revenue.

If “fear of Amazon” is the factor that made big agents relent in their opposition to subscription, would they also support joining an Amazon subscription service? That’s a trickier call, but as noted above, Amazon would have the capability to sweeten their offer to make it more compelling if that’s what they had to do.

But the main thing that works in favor of participation, now that the dam may have broken, is the psychology of trade publishing. Every big trade publisher has grown to be what they are today by selling their publications through intermediaries. Bookstores and then Amazon became the “gatekeepers”, owners of the customers. There was a symbiotic relationship: the retailers depended on publishers to deliver products to please their consumers and the publishers depended on the retailers to merchandise their offerings and manage the transactions. Access to a retailer’s customers first depended on getting your offerings into their store and then on having them be seen by the largest possible number of the store’s customers. That meant front tables and face-out display in the physical world; it means the right screen real estate, recommendations, and response to search terms in the virtual one.

That’s why the current hegemonies of Barnes & Noble and Amazon are so disconcerting to publishers. And that’s why the potential control of customer access by Scribd or Oyster might now look more like counterweight than threat.

Of course, it is also possible that the price-and-payment models Scribd and Oyster have begun with will prove unsustainable and that HarperCollins and Simon & Schuster — and their authors — will simply be the beneficiaries of a short-term bonanza financed by money that took a flyer that didn’t pay off. (And they’re not done taking those flyers.) That seems to me at least as likely as an outcome as these broad subscription offers becoming a permanent part of the bookselling landscape.

A lot going on around our place, so we haven’t had the time to switch away from what has become the horrendous service from Feedburner distributing The Shatzkin Files to its email subscribers. This one from last week on Amazon and Hachette (which is also linked to above) never was sent. (Of course, as I write this, who knows if this one will be or not?) It was written before the latest escalation where Amazon has removed pre-order buttons from Hachette book, a nasty blow that makes getting books on the bestseller list the week they come out very much harder. A lot has been written on this subject, but I think it still delivers some consideration of what it all means that hasn’t been picked up anywhere else.

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  • nate

    I agree with you that Amazon (and its non-presence in ebook subs) is going to be a driving factor for that niche, but I’m not so sure Amazon will launch a third subscription offering – not one specifically for ebooks, anyway.
    I think if Amazon launches a paid subscription content service it will look more like Kindle FreeTime Unlimited or Amazon Prime. Those services offer a spectrum of content and not just ebooks.
    I also think Amazon is going to buy Oyster (assuming the business model works out) but that won’t be happening soon.

    • http://idealog.com/blog Mike Shatzkin

      Pretty much disagree across the board. Oyster isn’t even beating Scribd, at the moment. They have nothing to offer Amazon. And if Amazon sees that subscription services are taking ebook sales away, they’ll compete directly with them. I am not saying that the kind of offer you envision isn’t also possible, but Amazon can’t sit back and see a bunch of ebook readers taken off the market for them without retaliating in kind.

  • http://www.smashwords.com/ MarkCoker

    Mike, the indie angle. Smashwords titles will contribute to the viability of their business models. A couple primary reasons: 1. We’ve helped Oyster and Scribd achieve critical mass. We supply about 250,000 of each service’s title count, so over half of each of their catalogs. 2. Nearly 40,000 of our titles are priced at FREE, which means our titles provide hours of reader enjoyment at no cost to the service. Our remaining titles are low-cost, usually $3.99 or less, which means more hours of reading pleasure at less cost to the service.

    • http://idealog.com/blog Mike Shatzkin

      Mark, it all depends on how the consumption breaks down. I can tell you that on my Scribd subscription, where I’ve read a book and big chunks of three others in the week I’ve had it, they push a lot of stuff on me on the opening screens and not of it looks indie. Some of it looked public domain. Obviously, with Smashwords prices, they would have an interest in pushing your books. It will be interesting to see whether they can make their model work and whether your authors make much money. This is a case where the more you make, the better it is for the services, because more expensive product isn’t being consumed when yours is. A very interesting experiment is taking place.

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  • EricWelch

    A reader’s perspective who loves publishing (I read PW and Book Review Digest religiously in high school in the early sixties): Didn’t Random House own Book-of-the-Month Club years ago when I was a member of that and the History Book Club? I remember drooling over the 4-books for a $1 and would subscribe, fulfill my agreement, quit and then rejoin. Those were hardcover books (special editions, admittedly) but if you cost it out, I was getting hardcover books for about $8.00 each over the course of a year ($4 + an average price of $15 per book with a commitment to buy 4). I assume that was still profitable for them and I’ve been surprised that the legacy publishers never tried something similar with ebooks. I may not be your average reader (My wife and I spend about $4,000 per year on books – me exclusively ebooks now; she print books that she then gives to our daughter who then puts them in her middle school library – 2 sales lost) but I think I speak for many when we note that the publisher “brand” is completely irrelevant, especially with all the sub-brands like Nan Talese, etc.

    I recently subscribed to Scribd and was pleasantly surprised by the mix of books, Dennis LeHane, Bernard Cornwall, a multitude of interesting history books, etc. and the ability to upload personal pdfs for reading later (better than Readability.) Scribd over Oyster because it’s available for multiple platforms unlike Oyster which, for the moment, is iOS only. (Note there is a device number limit to prevent excessive sharing.) So far, given competition from my Kindle and other Android devices, I’ve been reading about 2-3 Scribd books per month (according to my Goodreads account, I have averaged reading about 112 books and reviews per year.) Had the publishers pooled their catalogs and offered a subscription service for ebooks (and sell) instead of the silly Bookish nonsense, they could have blown Amazon out of the water and captured the full income.

    • http://idealog.com/blog Mike Shatzkin

      I agree Bookish was nonsense.

      Doubleday owned Literary Guild. Time-Life owned BOMC. I don’t believe Random ever owned a book club.

  • http://xistpublishing.com Calee @ Xist Publishing

    I think that Amazon is using Kindle Free Time Unlimited to tap a market that they had a hard time selling to–children. Amazon does a great job of suggesting what I’d like to read but when I was buying kids eBooks, the algorithm seemed to get confused. Now that we used KFTU, the kids get their books (and apps!) and I see recommendation for stuff I’d like. I would suspect they’re gathering data on what actually gets used through KFTU and then will extrapolate that into birthday-time suggestions or something to that effect.

    At Xist Publishing, we’ve been very happy with niche subscription services hosting our children’s ebooks, particularly with Epic! who has the best platform and vendor services team we’ve seen. I think parents will find this model particularly attractive, particularly since it’s one that many already use for kids activities and online games anyway.

  • Sanford Gray Thatcher

    Of course, this is all about subscription services to individuals. Nonprofit scholarly publishers have been successful with ebook subscription services to libraries, like UPeC, JSTOR, etc. They are not without problems of their own, just different ones.

    • http://idealog.com/blog Mike Shatzkin

      My skepticism about the commercial viability of subscription models extends only to broad-based, general “Spotify- or Netflix-for-ebooks” propositions. Things are quite different in professional areas and in niches. Safari is a sensible and successful business.

      Mike

  • Rui Almeida

    Random House Germany (Bertelsmann) is playing with the subscription model via Skoobe.de. Regarding the issue of turning the 1000$ costumer into 100$ a year, they are experimenting with tears – different quantity of books, for different periods, for different prices.

    Even with lower profitability and turnover, publishers and retailers probably are not going to be able to avoid the subscription model. It’s a matter of user experience and value perception from the user point of view. Comparing with Google, Youtube, Facebook, Slideshare, Scribd, Oyster, the tabs on a browser, or inserting a URL on a browser, having to search for a book buying and downloading it, when comparing to simply choosing and reading, it’s a poor ux. Otherwise, nature will find a way, has the music and moovies industrys already learned.

    • http://idealog.com/blog Mike Shatzkin

      Yes, Random in Germany is teamed up with Holtzbrinck on subscriptions.
      I am not sure about the “inevitability”, but even if it is true, delaying as long as possible is in the best interests of most authors and all publishers of highly-branded books. I believe the current models are unsustainable; let’s see how both Oyster and Scribd do at getting subscribers and then whether their cash holds out as they execute on their current licensing arrangements.

  • Lucy B

    I wish I’d seen this post when it first went up since I’ve been having this exact discussion with several trad published friends entering new contracts. I haven’t seen agents withdrawing objections to subscription models so much as not really knowing how it’s going to work because they’re not getting much info from publishers except, “Your author is getting paid well now, trust us.” When asked how a “sale” is defined, publishers say, “as a normal ebook sale.” When asked what that means — per download? Per percentage read? The answer agents pass along from pubs is “as a normal ebook sale.” How will this work with out of print clauses? No one seems to know.

    However, since the publisher is reassuring agents that the pay is good, “trust us,” agents seem to be willing to go along (and yes, I’ve seen more than one pub respond with “trust us, this is good for authors but I can’t really give you more details,” which the agent has passed along to the author with a “shrug, I’ll guess we’ll see.”)

    I find it astonishing that agents aren’t being more proactive here in trying to set the terms for how this will work with authors or being more thoughtful about how this might affect authors down the road. One friend pushed his agent to try to get something related to subscriptions written into his contract — even if it was a “if subscription services become more than X% of my income, we have the right to negotiate the terms related to that” — and the pub refused because they didn’t really know how it worked well enough to do so. So publishers are clearly engaged in a sales model for which there are no contract terms applicable — this is a recipe for disaster for authors if you ask me.

    There seems to be little discussion about what happens down the road if one of these services decides to pay less. Or decides that a sale is 70% of the ebook read rather than 40%. I agree with you that publishers may see subscription as the best answer to compete against large ebook distributors such as Amazon, but I’m concerned where this will leave the author in a few years. And agents need to be the ones asking these questions and having these discussions, not just waiting around for when pubs deign to tell them how much their authors will be making.

    • http://idealog.com/blog Mike Shatzkin

      Lucy, I am pretty sure that the 80% of cover price payment (which is what I understand it to be, but without written evidence) and the threshold that triggers the payment (don’t know: 10% of the book read, probably?) are written in contracts between the publishers and Scribd and Oyster. So your final concern, that they could just arbitrarily decide to move the goalposts on one of those, is not likely.

      I don’t know what your agent knows and whether s/he differentiates among clients as to what s/he tells them. I know that *some *agents know both the payment percentage and the trigger percentage. There is probably a hierarchy there, as there are with so many things. And the agents who are kept well-informed will have a split loyalty. They do the job for their clients by maintaining close relationships with the publishers and that may depend on limiting the spread of the knowledge of these confidential terms.
      In general, the bigger the author, the more they have to fear from subscription models succeeding. That fact keeps agents very much on their toes on this subject.

      I can really understand a publisher strongly resisting a renegotiate clause in a standard contract. The variation in author contracts is one of the things that slows big publishers down considerably when they need to try some sort of new sales model. That’s not a good thing in the current era, when authors really *want *publishers to try new things. For what it’s worth, I think the Harper and S&S authors will get a bit of a bonanza out of the subscription deals those publishers made with Scribd and Oyster. I don’t think the models are sustainable, so either the terms will get worse or the initiatives will fail but, in the meantime, some publishers and authors will cash some checks, which I think is a good thing.

      • Lucy B

        Thanks for your response! Most of the agents I’ve talked to about this also don’t see the subscription service working. I’m less comfortable betting future income on that sort of speculation, but such is the way in all industries — no one can see the future. I think I find it most frustrating that this is clearly a model that publishers are using, so why not build it into the author contract? My publishing contracts all have re-negotiation triggers for various things, why not for this? As a lawyer, I rarely see “we didn’t bother putting it in the contract” work out well.

        I wasn’t clear with my other point — yes the pubs and the subscription service had contracts so there’s no arbitrary goal post moving (though it is an arbitrary definition of “sale”). I meant what happens when Oyster or Scribd has the bargaining power of…say… Amazon and goes back to the publisher asking for a different cut? This could be a great short term benefit, with longer term problems. Pretty much the same way Amazon was when they pushed the ebook market.

        And you’re right, it’s much more likely to affect the bigger author and that’s who I have in mind right now — two of the authors I’ve been discussing this with are lead titles whose new books are available through subscription; this is why it’s a concern to them and me. Neither of their agents (both top of the field) have been able to get concrete details from pubs on how subscription will play into future author earnings.

      • http://idealog.com/blog Mike Shatzkin

        Lucy, your scenario by which Scribd and/or Oyster come back to negotiate better terms is almost certainly what they intend to have happen. My hunch is that they’ll run out of runway before that jet can take off. Let’s remember that only 2 of the Big Five have gone for the deal even as it is!