The Shatzkin Files

Subscriptions are in the news this week

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Subscriptions for ebooks are certainly in the news this week. Amazon just announced their Kindle Unlimited offering, taking its place beside Oyster and Scribd as a “one price for all you can eat” Netflix- or Spotify-for-ebooks program. And the Book Industry Study Group has released a lengthy and fact-filled report from Ted Hill and Kate Lara covering subscriptions across publishing segments.

It is hard to quarrel with the report’s contention that “subscriptions are here to stay”. The report makes clear, and documents extensively, that there are a great variety of ways subscriptions can be offered and that tools making it easier to manage them are becoming cheaper, better, and more ubiquitous. The report suggests that subscriptions could occur for as narrow an offering as one author’s works. As technology enables subscription offers to be economically viable with less and less revenue, the tendency for more and more publishers to want to “own” their customers, combined with the tendency for publishers to build up their intellectual property inventory in an audience-centric (vertical) way, either organically or by acquisition, it is easy to see how they could proliferate.

When I have expressed skepticism in the past about the commercial viability — or commercial importance — of subscription services, my intention was (is) to confine my skepticism to broad-based services like KU, Oyster, and Scribd. In other segments, the viability of the model is obvious. Safari has operated successfully for a decade-and-a-half. Journal publishers figured out in the 1990s that selling annual access to the whole catalog of their publications, including backlist, was an opportunity presented by digital delivery because of the value of being able to search across the catalog. The science-fiction publisher Baen has had an apparently successful subscription offering for years. And patron-driven acquisition, which the BISG report calls a form of subscription (loose defining, to be sure), allows a publisher’s whole catalog to be exposed to a library’s patron base with purchase decisions to follow (rather than patrons only being able to see what a library had already bought) just makes sense for everybody.

But the consumer ebook business is a different animal and it is far from obvious (to me) that a model can be constructed that will satisfy all the stakeholders and provide profits for the model owner. But the pieces are certainly in place for us to find out.

It is clear from the catalogs presented by KU, Oyster, and Scribd that the jury on subscriptions is still out because big publishers are still reluctant to participate. No Big Five house has put books into Kindle Unlimited. Only HarperCollins and Simon & Schuster are (as yet) participating with Oyster and Scribd. Penguin Random House, Macmillan, and Hachette have — so far — held out. What those houses do in the next few months will tell us a lot about how likely the concept of the broad-based ebook subscription is to succeed in the future.

The BISG report surmises, and I agree, that only PRH could possibly deliver a general subscription offer on their own. I “predicted” some time ago that they would. A top Random House strategist tried to set me straight on that some months ago. This person asked the rhetorical question: “why would we want to turn $1000 a year book customers into $100 a year book customers?” Last week, an even more senior executive, recalling that s/he had read this speculation from me told me directly and assertively, “we aren’t going to do that.” (Random House executive Madeline McIntosh is quoted in the Hill-Lara report issued by BISG saying “Many people who are buying our books today are spending more than they would with a subscription.  If that amount starts to dip, then subscription services will become more interesting to us.”)

These people are straight shooters. I believe them when they describe their current intentions. But what if Scribd and Oyster and KU build big subscriber bases? And what if those subscriber bases tend to buy fewer books outside the subscription offering? It is in a publisher’s DNA to push books into any channel that will take them. They have resisted the subscription offers so far because they don’t want to empower an aggregating intermediary the way Amazon is now empowered (which is why KU has the hardest time pulling big publisher books into its aggregation) to beat them down on terms. This is good forward thinking if staying out stops the subscription services from reaching viability. But what if it doesn’t? How long can publishers refuse to participate in revenue opportunities for their books and authors?

The offers (as we understand them) by Scribd and Oyster, and in other ways by Amazon, have been very generous. Scribd and Oyster are apparently paying 80% of the cover price (to the big agency publishers; others don’t get that deal) once a book is deemed “bought”, which requires a threshold amount of the book — often suggested to be 10% for the Big Houses, which is where Amazon put the bar for Kindle Direct Publishing authors within Kindle Unlimited — has been perused by the subscriber. (Not everybody gets that deal either.) 

Amazon presumes the right to include books in Kindle Unlimited from its wholesale trading partners (everybody but the Big Five), but it considers the ebook “sold” when it is cracked, a far more generous interpretation of when a book has been consumed. (Nor is that deal for everybody. For authors and pubs participating in KU via KDP Select, the threshold for a “sale” is 10% like Oyster. Then they are compensated from the “KDP Select Global Fund”.) The introduction of KU and the various terms around it have been met by initial grumbling in Amazon’s indie author community, according to both Publishers Lunch and Hugh Howey.

Agents will be seeing what the subscription revenues mean to their clients. It will be harder for them to get a handle on whether those subscription services are cannibalizing regular per-copy sales, but they will have ample information from which to form opinions about that as well.

Part of what holds back the big publishers from participation in subscriptions is a fear that agents share. Today Scribd and Oyster offer 80 percent of cover price, and Amazon pays the minute an ebook is opened, because that’s what they have to do to get books in their service. And the books in the service are what bring in the subscribers.

But if one of these services has a million members three years from now, each individual book won’t be quite as important anymore. Just as Amazon can get along without maximizing their sales of Hachette books today, the subscription owners will see a different, and lower, value for each book and each publisher then. Amazon gambles today that the customers of theirs who don’t find the Hachette book they’re looking for will often just buy something else rather than go shop somewhere else. Their own subscription lock-in, PRIME, shifts the odds in their favor there.

Amazon will be in this game to stay. Offering Kindle Unlimited is relatively painless for them. They have the books and they have the audience; it is just another way to keep their customers loyal. The big questions for the industry are whether Oyster and Scribd succeed in taking a substantial number of single-purchase customers out of the market and, if they can, whether they have a sustainable model with the prices they charge customers and the way they compensate publishers.

If what they have works for them, then all publishers will eventually have to play. That will mean that HarperCollins and S&S will be joined by Hachette and Macmillan. And despite what their executives tell me today, I’d bet a steak dinner that Penguin Random House will see more opportunity and less risk in creating their own service than in joining one of the existing ones. In fact, a Penguin Random House “backlist only” subscription offer today would constitute the most robust commercial assortment in the marketplace if it existed.

It has seemed to me for a long time, and I said in a public forum over a year ago, that all the Big Five (and others) should immediately create a subscription service for kids’ books. Parents want their kids to be able to “shop” without actually delegating to them the decisions to spend money; many would love a service of this kind, even if it were publisher-specific. As the support services Hill and Lara describe get cheaper and better and better known, perhaps that will start to happen.

We will cover subscriptions at Digital Book World with a panel chaired by Ted Hill. Scribd and Oyster have already agreed to participate.

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  • Clam

    At the current rate, Oyster and Scribd will run out of money soon. Paying 80% of the cover price is not sustainable. If a reader read 2 books a month (with the cover price at $5.99 each), that’s a loss to Oyster and Scribd.

    I have a feeling that most subscriber to Oyster and Scribd read more than 2 books a month.

    Amazon, on the other hand, can play the long-game. It won’t run out of money like Oyster/Scribd will. Short term loss for long-term gain.

    • I think both Scribd and Oyster have deep pockets. And although I sort of agree with you in principle about consumption. I’m in my second month on Scribd. Been busy, so Catch-22 has lasted me all month. The first month I read 3 books.


      • Clam

        I don’t think they have deep pockets.

        Oyster has $17 million in funding according to Crunchbase, a website that track start-up funding.

        Scribd has $25.8 million in funding.

        Which mean they will need new funding in the near future if the losses get too big.

        Investors would be leery to invest in a start-up that has Amazon as a director competitor.

        Amazon saw a big threat and has responded very aggressively. And very early.

        Apple didn’t respond to Spotify until 2014 when Spotify has 11 million paying subscribers and 30 million free subscribers.

        Amazon is acting like a nimble start-up, rather than a slow dominant incumbent. Not a good thing for Oyster/Scribd.

      • If they get big enough to run through that kind of money, they’ll get more funding. Remember, whatever their presumed losses are a function of their subscription base. To run out of money soon would satisfy everybody involved in both businesses beyond their wildest dreams.

        What you’re talking about is a problem if they have millions of subscribers. I’d guess they’re hoping for hundreds of thousands pretty quickly and I don’t know successful they’ll be in getting it. That’s my hunch.

      • Elliot1234

        Running out of money is a failure. That is not what people like to see. The composition of the subscription base is far more important than the fact that the company ran out of money. What is the distribution of monthly downloads over all subscribers? What is the distibution of costs per customer over the subscriber base? What is the distribution of net P/L over the subscription base?

        This is the stuff investors look. Nobody has a dream of a subscription base that costs more than it brings in.

    • Nirmala Erway

      The CEO of Scribd was quoted recently on Forbes saying that on average their members so far read less than one book a month. He also said their membership is growing at a rate of 50% a month. Those are both very good figures for them.

  • Clam

    Here’s something to ponder.

    Would Amazon have launch Kindle Unlimited if Oyster and Scribd didn’t exist?

    Would Oyster and Scribd exist without the backing of HarperCollins and Simon & Schuster?

    Could it be possible that HarperCollins and Simon & Schuster are responsible for getting this all started?

    I believe Amazon is reacting because subscription service will disrupts its selling of books. It’s better to be the disrupter rather than let others disrupt it.

    For example, Spotify has disrupted Apple Itunes. Downloads are down 13% this year and will continue to be on a downward path as more people switch from purchasing to renting (subscription). Streaming is already a $2 billion a year business in the USA vs. $2.6 billion a year for album+single downloading. And according to Billboard, streaming is up 42% in the first half of 2014.

    Apple reacted way too late. And it has proved costly. Beats Music portion of the $3 billion paid for Beats is said to be $500 million.

    • What you spin as somehow conspiratorial I just see as evolutionary. This is something that has to be tried. It’s obvious. And everybody’s making reasonable commercial decisions in a circumstance where new roads are being paved. Everything starts somewhere.

  • EricWelch

    Scribd and Oyster are paying 80% of the cover price? The hardcover retail price? Paperback? or the retail ebook price? And is that per reader or one time purchase price?

    • My understanding is that Scibd and Oyster pay the agency publishers 80 percent of the ebook price when a subscriber has passed a specific threshold of “use”, which I also understand to be 10% of the book. I have not seen a contract and I have not been told that directly by anybody at the publishers or Scribd and Oyster. But I *believe *Michael Cader has published information to this effect, and I know it from sources I consider reliable. Amazon also “buys” the books from their publishers, but they pay what would have been the wholesale price (less than 80%) but apparently pay the instant the book is open, which is considerably more generous than 10%. It could mutiply the number of books that would qualify to get paid.

      • EricWelch

        I buy a lot of ebooks and have joined Scribd. I immediately joined KU for the trial but dropped after two weeks as the mix of weeks didn’t appeal to me as much as that on Scribd (I read mysteries, history, biography, and technology, some history of science.) In addition I like the way Scribd permits me to add books to my “library” for retrieval and perusal later. KU limited access at any given time to just 10. I’m still a big Amazon fan and “Prime” member; this idea just didn’t work for me so now I check to see if a book I want is on Scribd. If not, I buy it. So far between buying and Scribd, I’m reading about 1.5-2 Scribd books per month. I expect your experience is more typical.

      • You get through more books than I do. I use Scribd and split the rest between Amazon and Google Play, all read on my iPhone. I like the Scribd presentation too although having the “library” doesn’t have that much value. Both Sribd and the etailers download books very quickly. If it archived with them or in my phone makes very little difference to me. And I don’t really have a preference among the three reading systems. All three work fine and render fine.

      • Elliot1234

        I went to Amazon with every intention of buying Flash Boys. Imagine my delight when I saw the button saying there was no charge since I had signed up for the KU 30-day free trial. That’s $15 I will treasure.

  • Mike, I had read this a bit back, I think via The Digital Reader, and have been wanting to come back and review it and add what I could from a “very” small self-published writer. I’m in both Oyster and Scribd, and tried Kindle Unlimited for my three day option trial and pulled out (I’d tried Select three previous times, including all in Oct-Dec last year without no results).

    So you may already know the info below, if so, my apologies.

    For writers like myself, distributed to Scribd and Oyster either via Smashwords, D2S (Scribd only I think), or BookBaby, we effectively get 60% of our retail price when a reader crosses the 30% read mark.

    The 30% can easily be reached via 20% (10% intro is assumed) if a reader skims further into the book, so non-fiction and/or books with internal Table of Contents can benefit from this.

    Scribd also (and maybe Oyster) pays a browse rate of 1/10th the full royalty if a reader at least hits 10% into the book.

    KU of course as you say pays out of a fund. The amount can change, and the terms can change; but Amazon has been pretty good about giving writers an out if they don’t like the new terms.

    And despite all the less desirable rates, and my prior unsatisfying experiences with Select, I would have still stayed and tried out KU beyond the 3 day option period, mainly because, from way back, beginning with Netflix, I really believe in the model. It encourages discoverability, exploration, and ease of mind trying out new titles etc.

    The main reason I didn’t stay in Kindle Unlimited, and the biggest difference between KU and Scribd and Oyster, is selective required exclusivity.

    I say selective because many of the bigger name authors, many of whom ardently support Amazon, aren’t required to be exclusive, though some choose to be. Bigger draws getting better deals doesn’t bother me. Those writers earned it. Good for them.

    But exclusivity creates marketing problems for me.

    I can’t drive my readers to one location of their choice for them to try or read all my titles. Which is one of subscription plans’ biggest draw for me, as a reader and a writer.

    Plus, really, it’s unfair.

    And, I think it’s weird that writers complain bitterly about trad publisher’s terms (which are horrible, I’d rather say small and self-published) but don’t about selectively enforced exclusivity to participate in a subscription plan from Amazon.

    And…the exclusivity also prohibits allowing authors to let libraries carry their titles. Which I think is a big deal.

    So, though there are hundreds of thousands of self-published authors in Kindle Unlimited, inversely, there are also literally hundreds of thousands of self-published authors that are not, but are in Scribd and Oyster. And in libraries.

    Well, I’ve gone on more than long enough 🙂

    I hope ya’ll have a transcript or video made of the Digital Book World subscription panel. And am very very glad Scribd and Oyster will both be there.

    Thanks so much, Mike.

    • Thanks for the news from the front. I think aspiring authors should seek all the discovery then can generate so going into any of the subscription services makes strategic sense. But that’s aside from the details of how you get paid.