Not all subscription services are created equal

Smashwords founder Mark Coker explains why the success or failure of subscription services like Amazon's Kindle Unlimited, Scribd and Oyster will have considerable implications for the future of publishing.

Mark CokerMark Coker: Subscription services have a bright future, and will make more books more accessible to more readers. Yes, they will eat into single-copy ebook sales, but the net impact will be accretive and will increase readership for publishers.

From the reader's point of view, the main services (Amazon's Kindle Unlimited, Scribd, Oyster...) look quite similar. They offer a virtually unlimited never-ending flow of hundreds of thousands of books that can be consumed as if they were a utility like water or electricity. After paying the monthly subscription fee of under $10, the books feel free. Readers can browse, sample and read, relieved of the cognitive friction of making purchase decisions. It makes it easy for readers to take chances on a book without risking buyer's remorse.

But not all subscription services are created equal. From an author or publisher's point of view, Kindle Unlimited (KU) is dramatically different from Scribd and Oyster in terms of business model and long term strategy. The success or failure of these two opposing approaches will have considerable implications for the future of publishing.

Scribd and Oyster designed their services in consultation with publishers, and as a result these services are publisher-friendly. Smashwords is probably the largest single supplier of books to Scribd and Oyster, and I'm pleased to report these two services were our fastest growing retail channels in 2014. Our authors and publishers earn Agency-level margins once the reader reads past a certain threshold of approximately 10%. Because Scribd and Oyster pay terms similar to Agency retailers, it means the business interests of the subscription service are aligned with the publisher's business interests.

Some publishers fear that subscription services will devalue books, with this devaluation in the form of reader perceptions and publisher earnings. The Oyster and Scribd models preserve value. Here's how: In order for Oyster and Scribd to achieve profitability, they must ensure that the subscription fees they receive from readers are greater than the costs they pay publishers for those books. This provides an effective floor on the possibility of devaluation. For example, if Scribd and Oyster offered unlimited reading for $2.99 a month, they'd go out of business because they couldn't afford to pay publishers for the books. If they price their services too high, readers will abandon the subscription service. So the Scribd and Oyster business models are designed with built-in checks and balances that work to the mutual advantage of readers, subscription services and publishers.

There are no such self-correcting protective mechanisms with Kindle Unlimited (KU). With few exceptions, a publisher's payment in KU for each qualified read is not based on the book's list price. Instead, the payment comes out of a shared pool based on their book's prorated share of reading activity for the month. The problem with pool-based subscription models is that the publisher loses control over the value of a qualified read. Amazon decides the size of the pool and doesn't disclose the author or publisher's earnings until weeks after the book is read. In recent months, the payment per qualified read for KU has been running under $1.40. For indie ebook authors who typically price their ebooks at $3.99, this represents a 50% drop in per-unit earnings because a $3.99 ebook would otherwise earn almost $2.80 for an ordinary single copy sale. For publishers who price closer to $9.99, $1.40 is nothing short of business-destroying. This is devaluation. Most KU books are supplied by self-published authors, and these authors are required to make their books exclusive to Amazon. By recent counts, Amazon is approaching one million titles in the KU catalog, which means KU subscribers now have nearly one million reasons to never purchase another single-copy ebook again. Amazon heavily merchandises books that participate in KU by advertising to their customers they can enjoy a book for free as part of a KU subscription.

KU represents Amazon's end-run around Agency pricing. It's how Amazon will strip publishers of pricing control and margin. By wielding exclusive control over a massive catalog of high-quality books, Amazon decides the value of each qualified read, decides what publishers deserve to be paid for a book, and thereby determines what publishers should earn for their books. With KU, Amazon is turning authors and publishers into tenant farmers tilling Amazon soil. Look no further than the Great Irish Potato Famine to understand how this is already playing out.

Authors who refuse to participate in KU have seen their single-copy sales decline as Amazon drives customers into the subscription model. And authors who cede their publishing future to Amazon by going exclusive will find their earnings are at the whim and mercy of Amazon. What if Amazon decides to lower the price of their subscription to $5.00, or $3.00, or decides the publisher deserves only $.50 for a read? Not only would it ultimately destroy the businesses of most of Amazon's competing ebook retailers, it would have a chilling effect on the formation of all new retailing models, and it would destroy the livelihoods of many publishers and authors alike.

My concerns about the long term implications of KU are not pie in the sky speculation. The fallout is observable today. It's becoming untenable for pure-play ebook retailers to compete in a market dominated by Amazon where Amazon controls the earnings paid to its publisher suppliers.

Here's how the story will play out if publishers don't change course now: In a few years, there's a good chance that 90% of ebook sales will go to three companies that can afford to sell books at no profit – Amazon, Google and Apple. Most pure-play book retailers will go out of business.

Publishers created Amazon with their desire to create a strong counter balance to large American chains such as Barnes & Noble and Borders. Now publishers need a counterbalance to Amazon. The window of opportunity for publishers to save themselves from Amazon and Amazon KU is closing.

Some large publishers might view KU as an isolated problem for self-published authors, yet this is a dangerous view. As the market share for ebooks increases, and as indie authors gain an increased share of this market, and as Amazon's exclusive catalog grows, KU will suck the oxygen out of the air for single-title publisher sales. Consumers are price sensitive. If they can access quality books for what feels like free from Amazon, subscribers will begin to view single-copy purchases as too expensive.

The only players with the power to stop KU dead in its tracks today are indie authors, but this is unlikely to happen. There are simply too many authors who feel it's better to earn 25 cents than to earn nothing. They feel publishers have abandoned them so they run into Amazon's waiting arms.

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