Examining the Business Model of Ebook Subscription Services (Part I)

This is the first installment of a two-part series in which I explore the business models and potential impact of ebook subscription services.

In recent months, we’ve witnessed the launch of two high-profile ebook subscription services – Oyster and Scribd.  Both aim to do for ebooks what Spotify did for music and what Netflix did for film and television entertainment.

They’ll provide readers access to an all-your-eyeballs-can-eat smorgasbord cornucopia of thousands of ebooks for a subscription fee ranging from only $8.99 per month (Scribd) to $9.95 per month (Oyster).

When talk of ebook subscription services surfaced in months past, there was much hand-wringing in the publishing community that such services would devalue books and harm publishers and authors. 

Yet as the launches of Oyster and Scribd indicate, some (but not all) of those skeptics were silenced once they learned the publisher-friendly nature of the compensation models.  Several small publishers and one Big 5 publisher – HarperCollins – signed on to work with both Scribd and Oyster.  Smashwords announced an agreement with Oyster last month. We're now in the process of shipping over 200,000 ebooks to them as I write.

I’m a fan of both services because I think if they succeed, they’ll make reading more affordable, more accessible and more convenient for a segment of the reading public.  I think they’ll expand the overall market for books.

In public, Scribd and Oyster have been conspicuously cagey about the nitty gritty details of how they compensate publishers.

Trip Adler, CEO of Scribd, provided Jeremy Greenfield of Digital Book World clues to their model when he commented, “When somebody reads a book, we pay a publisher as if they sold the book. We have a fairly complicated system to determine if a consumer actually has read the book. The amount the publisher gets is based on the digital list price.”

Separately, Adler told Laura Hazard Owen of Paid Content that Scribd plans to be more public about the terms in the future.  Paid Content also reported that HarperCollins CEO Brian Murray told Publishers Lunch, “We have negotiated very hard, to the point where if the whole business went this way, we and our authors would be very pleased, because the economics are more favorable…[it's] the exact opposite of the music industry’s subscriptions models. The revenues that go to our authors is up, somewhat significantly.” 

To my knowledge, no other Big 5 publishers have signed on, at least not yet.

The ebook subscription services face an interesting business challenge.  For any new ebook purveyor to succeed, it must satisfy three primary stakeholders:  1. Customers (readers).  2. Suppliers of the product they sell (authors and publishers).   3. Itself (it must earn a profit so it can keep the lights on and reinvest in its business).

If the subscription services sign up millions of people who never read, they’ll earn high profits but will disappoint publishers.  Disappointed publishers will bail and subscribers will cancel.  If the subscription services sign up too many power-readers, they’ll go out of business, thereby denying readers and publishers the benefit of their service.

If the services can strike the right Goldilocks balance of serving readers, publishers and their own business interests, they have the opportunity to build the next generation of successful ebook purveyors.

The services should be especially appealing to power readers, who can now read an unlimited number of books for only $9.95 per month.  Can these subscription services turn a profit in the face of these book gluttons?

The answer, I think, is yes.

Just as an all-you-can-eat buffet will lose money on the gluttons, so too will the ebook subscription services lose money on some subscribers.  But just like the eateries, the ebook subscription services are betting that that the vast majority of users will consume in moderation over time.

Perhaps an even more apt parallel would be how health clubs sell memberships.  They know that many subscribers rarely take full advantage of their services.  A health club membership, like an ebook service subscription, is often an aspirational purchase for subscribers.  As long as the reader wants to increase their reading in the future, they’re likely to maintain their subscription, even if they don’t actually read more.

Would the success of subscription services harm ebook retailers?  Not necessarily.  Book gluttons are likely to consume more books with subscription services than they could otherwise afford to buy, so their increased reading doesn’t necessary represent a lost sale to retailers.  Subscribers to ebook subscription services – the gluttons included – will still continue purchasing books at retailers because retailer catalogs offer greater selection.  Apple carries over two million books, whereas until recently Oyster carried only 100,000 books.  Four of the big five NY publishers aren’t distributing books to Oyster and Scribd yet, which means readers who want their books must purchase them at a retailer.  Even HarperCollins, which was the first big five publisher to dance with Oyster and Scribd, isn’t supplying its entire catalog of books to the subscription services.

Indie authors may hold the key to the success or failure of the new subscription services. 

At a time when the large NY publishers are over-pricing most of their ebooks, the average price of the books from Smashwords authors is about $3.15, and the median price is $2.99.  This means subscribers can enjoy more indie reading at less cost to the subscription service.  Smashwords will also supply over 20,000 books carrying a retail price of FREE to Oyster, which means Oyster subscribers can enjoy these titles with gluttonous abandon at no cost to Oyster.

This concludes part one of this two-part series.  Click here to read part II, where I examine how ebook subscription services will redefine the value of the book.

How Ebook Subscription Services May Redefine the Value of Books (Part II)

In part one of this two-part series, I examined business models of the all-you-read ebook subscription services.  Here in part two, I’ll examine how ebook subscription services may redefine the value of books.  The answer isn’t quite as obvious as we might think.

Way back in 2009, one of my first posts for Huffington Post was titled, “Why we Need $4.00 Books.”

In that post, I argued that publishers had an opportunity to utilize the then nascent ebook format to expand their global readership by offering low-cost ebooks.  I thought the lower price point would appeal  to a new group of readers in the same way that the introduction of the mass market paperback format increased readership over the previous hardcover format.  I believed low-cost ebooks were inevitable, and if publishers failed to provide them, someone else would.

In the four years since, that someone else was the indie (self-published) author.  Publishers have resisted dramatic price drops for fear of cannibalizing existing print and ebook sales.  Partially thanks to low prices, but also because of increased quality and professionalism, indie authors are now capturing an ever-increasing percentage of the ebook market, and an ever-increasing percentage of slots in all bestseller lists.

Enter ebook subscriptions such as Oyster and Scribd, where consumers pay under $10.00 per month to read an unlimited number of books.

What happens now to our notion of the value of the book?  If publishers were terrified four years ago by the prospect of low-cost ebooks, and terrified the same year when Amazon priced their ebooks below cost at $9.99, should they be terrified now of ebook subscription services?
No.  If publishers refuse to support these new subscription models, they'll continue to lose marketshare to those who do.

Of the big five New York Publishers, only HarperCollins has embraced the subscription services, yet it isn’t supplying its entire catalog.  Meanwhile, a large number of large independent publishers such as Sourcebooks and Workman have entered into agreements.  Smashwords announced an agreement with Oyster last month.  As I mentioned in part one of this two-part series, Smashwords today is midway through the process of shipping over 200,000 ebooks to Oyster, including over 20,000 books priced at FREE.

If these new subscription services are successful at attracting millions of readers, and if they can build viable, profitable businesses, what would that mean for the value of books?  The answer is more complex than we might at first think.

A fascinating characteristic of these services is that once a subscriber is enrolled, the service provides a virtually frictionless ebook consumption experience.  See a book you want to read?  Start reading now with a click, without the hassle of clicking a buy button, or entering your credit card information, or taking a financial risk on an unknown author or an unknown book.  Click and read, and if you don’t like the book, the reader has no worries and no buyer’s remorse.  They’ll just click to the next, all without concern of their end-of-month credit card bill.

Subscription services make books feel essentially free to their subscribers.  This means consumer purchase behavior will be liberated from the cognitive calculus every consumer performs at conventional retailers when they weigh their desire for a prospective purchase against the list price of that book.  As we found in the last two years in our annual Smashwords survey, and as conforms to general economic theory, lower cost goods generally get consumed more.  The human species and psyche evolved to binge in times of plenty and conserve in times of scarcity.

In the 2013 Smashwords survey, we found that free ebooks at Apple get 91 times more downloads than books carrying a price.  Across all the retailers in our study, we found that $2.99 and $3.99 ebooks were purchased, on average, about four times more frequently than ebooks priced $7.99 and up.

What happens when every book feels free from the consumer’s perspective?

When this dynamic plays out, I think the publishing industry will gain fascinating insight into what readers really want to read in the frictionless environment of zero-cost book shopping.

Will some Smashwords books already priced at FREE become more popular than their $12.99 competitors from the big publishers?  In some cases, it'll happen.

Friction-free subscription ebooks will alter the competitive fight for reader eyeballs.  The reader won’t know the difference between a free book and a $12.99 book.  Since the retail price is almost irrelevant to the reader, the authors and publishers listed in these subscription services can’t compete on price.  Instead, it’ll be more about the book.

I think the six most dominant consumption drivers will be as follows:

1. Word of mouth – Are my peers and friends recommending the book to me?  Does it have super-fabulous “WOW” reviews from other readers?
   
2. Cover image – The cover image is the first impression a book makes on a prospective reader.  Does it capture the reader’s eye and make them want to click and read?
   
3. Book title and description – Does the title and description amplify the desirability established by the cover?  Do they promise the reader the experience they seek?
   
4. Author brand – Much to the chagrin of publishers, the publisher’s brand on a book’s spine has never meant much to readers.  The author brand is what drives readers more than anything.  If the reader trusts the author to give them a great read, then that author will get more readers. Author brand will probably give big publishers some early advantage in the ebook reading game with subscription services because publishers still control the biggest name authors, and because indies aren’t able to underprice in the subscription sandbox.  This edge will erode over time as indie authors continue building massive fan bases with low prices at conventional retailers, and as more big name authors migrate to indie publishing (if ebook subscription services become a large an important channel for reaching readers, and big publishers refuse to make their books available to these services, it will accelerate the defection of big name authors to self publishing).
   
5. Subscription service merchandising – The subscription services, like ebook retailers, operate reading platforms that house a massive collections of books.  Like ebook retailers, the subscription services will merchandise and promote certain books above others to their subscribers.  They’ll seek to recommend books that will please their subscribers.  A great recommendation will make the subscriber happy, increase subscriber loyalty, decrease subscriber churn, and make the subscriber more likely to heed future recommendations from the service.  A poor recommendation will have the opposite effect – loss of trust and loss of subscribers.  This means subscription services will be incentivized to recommend high-quality books.  This means high-quality, low-cost ebooks from indie authors are likely to have a merchandising advantage over traditionally published books of equal quality but higher cost (once we complete our initial deliveries to Oyster, we’ll supply them a ranked list of Smashwords bestsellers to assist their merchandising).
   
6. Author marketing – Indie authors are building captive fanbases on Facebook, Twitter, blogs and on their private mailing lists.  Authors have the power to direct their fans to stores.  Will authors promote these subscription services with the same – or more – gusto than they promote their conventional ebook retailer outlets?  Authors who distribute to the subscription services, at least initially, will face less competition for readers because they’re competing against a few hundred thousand books, rather than millions of books at the major retailers.

Now back to my original question.  How will ebook subscription services redefine the value of books?  The answer isn't cut and dry.  If readers enjoy consuming books as a utility service, and these new subscription services take off, then readers will no longer think of books as having prices in the same way they once did.  Reading will become an on-demand experience.  Readers will feel closer and more connected to books.  If reader engagement with books increases, book access will become more valuable to readers.

If these services are successful, the dollars will flow to authors and publishers that maximize access and availability. I suspect that authors and publishers that make their books available to the subscription services will also experience greater sales through conventional retail channels, and if that happens the dollars spent on books will increase further, causing books to become more valuable, and more rewarding to the authors and publishers who produce them.

Indie authors are best positioned to thrive in this new world of ebook retailing where readers demand high-quality, low cost, high-availability books.

Apple iBooks Promotes GJ Walker-Smith's Saving Wishes as Book of the Week

Congratulations to Smashwords author G.J. Walker-Smith.

Apple today named G.J.'s free series starter, Saving Wishes, their Book of the Week in the US and Canada iBooks stores.  The title is receiving prominent front-page promotion on iBooks for the next seven days.

[Update November 1: Apple iBooks Australia and New Zealand have now also named Saving Wishes their Book of the Week.  Promotion running through Thursday, November 7!!]

The timing is great for G.J. because the third title in her series, Storm Shells, has been on preorder at Apple for over two months and is set for a release of November 11.  Based on its accumulated orders prior to today, it already had a high probability of hitting #1 at several of Apple's iBooks stores around the world when it goes onsale.  This week's Book of the Week promotion will only help because she still has another couple weeks to accumulate more orders.

G.J. provides Smashwords authors a great mini-case study on how to leverage the iBooks store to reach thousands of readers.  iBooks is now the world's second largest global ebook retailer, and it offers a wealth of merchandising opportunities for savvy authors.

Preorder Storm Shells at iBooks

How does an author get selected for such merchandising love?  It's not easy, but as I describe in my new iBooks Merchandising workshop viewable now at YouTube, there are a number of things Smashwords authors can do to maximize their odds.

The merchandising team at Apple has over 2 million books to choose from when selecting their Book of the Week, which means the odds of any one title receiving such merchandising love is extremely rare.  With only 52 weeks in the year and so many books to select from, the odds of any one title being selected is about 1 in 50,000.  Yet multiple Smashwords authors have already been selected.

How'd they do it?

One of the great things about Apple's selection process is that it's merit-based.  The titles they select have earned it, often by implementing many of the best practices I so often encourage our authors to adopt (click here for my video workshop on best practices).  In G.J.'s case, she made a number of smart moves, each of which contributed to her selection for this promotion.

At the risk of oversimplifying (and yes, this is an oversimplification!), here's are five things she did right:

• 1.  List *all* your books on Apple - This is a no-brainer and should go without saying, yet many authors don't yet have their books at Apple.  If your titles are locked up elsewhere, such as in KDP Select's exclusive program, you're missing out on the world's second largest ebook selling platform.  Millions of customers only shop at Apple iBooks.  It's important to have your entire list at Apple.  If you have an incomplete collection of books at Apple, they're less likely to promote your books.  Smashwords makes it fast, free and easy to get your books listed at all 51 of Apple's iBooks stores.  G.J. has all her titles at Apple distributed via Smashwords.
• 2.   Write a super-awesome book that delivers extreme satisfaction to readers - G.J.'s books get "WOW" reviews at Apple.  Apple's customers love her.  If you earn the attention of Apple's customers, you'll maximize your odds of gaining the attention of Apple's merchandising team.
• 3.  Great covers - G.J. has beautiful, professional-looking covers.  There's a consistent design theme across the covers, which helps unify the series.  Your cover is the first impression you make on a reader.  A poor cover chases readers away.  A great cover invites them in.
• 4.  Leverage FREE - Saving Wishes is a free, full-length series starter clocking in at over 100,000 words.  It's only been published since May, but because it's FREE it helped her build a massive following with Apple customers worldwide in a short period of time.  When you price at free, you eliminate the financial risk readers must take when they purchase a book from an unknown author.  In other words, you eliminate a key friction point that might prevent a reader from giving you a chance.  By giving the reader a full-length series starter, G.J. has over 100,000 words through which to earn the reader's trust.  By the end of the book, G.J. has earned the reader's trust with her writing.  The reader is emotionally invested in the characters and story, and they're more likely to purchase the next books in the series.  And that's what's happening.
• 5.  Leverage preorders - G.J. followed the recommended best practices for doing a successful preorder with her forthcoming book 3, Storm Shells.  When Smashwords launched our new preorder distribution feature a few months ago, I encouraged authors to allow at least 1-2 months preorder runway.  She gave the preorder ample runway - in this case over two months -  to accumulate orders.  With a free series starter driving sales of book 2, she had both book 1 and book 2 working for her this entire time to drive orders to Storm Shells' preorder.  A preorder allows the author to capture the reader's order at the moment they have the reader's attention and interest - right when they finish another book of yours and want to read more!  Thanks to the high number of accumulated orders for Storm Shells, it gives Apple increased confidence that their customers are excited about her books, and therefore gives Apple greater confidence to promote the book and the author to a broader audience.  Preorders give retailers yet another reason to promote your book.

These five items above can't entirely capture the multi-faceted factors that drive the selection process at Apple.  View my Apple merchandising workshop for more tips.

Most authors will never receive this kind of merchandising love, though I can tell you that the mere process of working to earn and deserve such merchandising promotion will help your book become more successful. If you implement best practices, and take full advantage of the talent and tools you have at your disposal, you will reach more readers, even without the boost of merchandising love.

I've written before about my concept of Viral Catalysts.  A Viral Catalyst is anything that makes your book more available, more discoverable, more desirable and more enjoyable to readers.  Viral Catalysts drive word of mouth.  Key to the Viral Catalyst concept is that there's no single magic bullet that helps an author become a bestseller.  A successful author must do many things right, while avoiding mistakes that can undermine success.

If you'd like to learn more about G.J. Walker Smith, check out her Smashwords Interview.

Smashwords Ebook Publishing Workshops on Youtube

I've posted a series of five ebook publishing workshops at Youtube.  Each is embedded below.

Whether you're considering publishing an ebook for the first time, or you're already an ebook publishing veteran, I hope you enjoy these workshops and learn new ideas that will help you publish with greater ease, confidence and success.

In total, they run eight hours.  It's like an all-day digital publishing seminar you can attend at your leisure.  Although the videos can be watched (or listened to) in any order, if you're new to ebook publishing, then start with #1 since it explains foundational information that will make the other videos more useful to you.

The ebook publishing workshop series includes:

#1 - An Introduction to Ebook Publishing (a primer and e-publishing checklist)
#2 - The Secrets to Ebook Publishing Success (best practices secrets for reaching more readers)
#3 - Smashwords Survey Helps Authors Sell More Books (pricing strategy and fun metrics)
#4 - 10 Trends Driving the Future of Authorship (indie authors are the future of publishing!)
#5 - How to Reach More Readers at Apple iBooks (merchandising secrets to grow sales!)
#6 - How to Add Navigation to Smashwords Ebooks (create a linked Table of Contents and NCX)


I've embedded each of them below.  If you enjoy them, please feel free to share them with a friend or embed them and repost them on your blog or website.

#1 - An Introduction to Ebook Publishing (a primer and e-publishing checklist)



#2 - The Secrets to Ebook Publishing Success (best practices secrets for reaching more readers)



#3 - Smashwords Survey Helps Authors Sell More Books (pricing strategy and fun metrics)



#4 - 10 Trends Driving the Future of Authorship (indie authors are the future of publishing!)



#5 - How to Reach More Readers at Apple iBooks (merchandising secrets to grow sales!)
This is a video recording of an online workshop event sponsored by ALLi, the Alliance of Indepedent Authors.  Thanks to Orna Ross of ALLi for recording and sharing this video!




 #6:   How to Add Navigation to a Smashwords Ebook (build a lined Table of Contents and NCX)




We'll develop more videos for the Smashwords Youtube page in the future, including shorter videos.  If there's a tutorial you'd like to see us create, post your wishlist below!