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.